Collaboration and education: necessities to avoid risks related to NIL collectives

Since June 2021 when the National Collegiate Athletics Association (NCAA) created an interim policy allowing college athletes to profit from their name, image and likeness (NIL), Baker Tilly has allied with a number of colleges and universities to help them – and their student athletes – navigate the evolving NIL environment. Currently, institutions are working to comply not just with NCAA policy and the patchwork of state laws and regulations relating to NIL, but also to the growing prevalence of NIL collectives.

These collectives are generally formed by third parties – an individual, alumni group or foundation – that operate outside the institution to support student athletes with their NIL goals. NIL collectives are a way for donors, alumni and/or general fans of an institution to invest in an athlete’s success. NIL collectives can be either for-profit or not-for-profit (tax-exempt). There are currently about 120 NIL collectives nationwide.

Tax-exempt NIL collectives – benefits and risks

As institutions maneuver the NIL era, it’s important to understand the key benefits and risks connected specifically with tax-exempt collectives.

Benefits:

• Individual contributors receive a charitable contribution deduction, which enhances the collective’s ability to raise more money.
• A business receives a tax break whether the collective is for-profit (write off contribution as a marketing deduction) or tax-exempt (receive a charitable contribution).
• The collective’s tax status doesn’t affect its end purpose. The athletes will still pay tax on any income received.

Risks:

• Tax-exempt collectives must remain committed to their mission regarding their tax-exempt status. Both the IRS and state attorneys general will likely audit the collectives.
• If a tax-exempt collective loses its tax-exempt status, it can no longer collect donations from individuals looking to make tax-deductible contributions.
• Such loss of funding may impact the NIL collective’s ability to sustain promises to student athletes and fulfill multi-year commitments to those student athletes.
• The institution’s reputation may be impacted. Should a collective fail to meet its commitments, (e.g., a collective that makes a multi-year commitment is no longer able to meet that commitment) the institution may suffer reputational damages simply due to its association with the collective even though the institution does not control the collective (e.g., guilt by association).

Institutional collaboration with NIL collectives

While NIL collectives are separate (and thus outside the jurisdiction) from colleges and universities they associate with, athletic and compliance departments still see a role in educating their student athletes on NIL– from providing media and branding training to teaching students about possible income tax ramifications of their NIL payments.

Conversely, the collectives also want to work with the colleges and universities. They don’t want the athletes to do anything that would cause them to lose eligibility. Further, the collectives and institutions know that only about 3% of athletes that sign NIL deals will have agents that can represent and guide them. Working together, both entities can advise the remaining 97% of student athletes in understanding the evolving NIL rules and opportunities.

Over the past two years, institutional leaders from across all NCAA divisions have learned that their student athletes desire to, and are actively participating in, procuring NIL deals. This level of interest and activity compels colleges and universities to pay attention to this movement in the collegiate athletics landscape to be competitive in recruiting and retaining student athletes who are deciding on which college to attend based on NIL opportunities.

Communication, education and collaboration among the NIL collectives, institutions, student athletes and their parents are necessary to ensure everyone benefits from these arrangements.