The Risks of Nonprofit NIL Collectives

As NIL continues its march through the world of collegiate athletics, we must be reminded of just how wide ranging its impact can be. This is especially true as NIL collectives grow in number and size.

An NIL collective is generally made to create business relationships for student athletes. They pool funds from a wide array of donors to help arrange contracts, do promotional activities and perform other functions that help facilitate NIL deals.

In some cases, these entities are establishing themselves as nonprofits. The James Moore collegiate athletics team has been speaking out on NIL collectives organizing as charities.

“We work hard to educate universities and their respective athletic departments to make sure they’re not caught by surprise,” said Katie Davis, a partner at James Moore. She further addressed the firm’s interest and outreach regarding NIL-related topics.

“Whether it’s the taxability of NIL earnings on athletes or the tax status of the NIL collectives formed, we recognize the tax reporting burden itself does not fall on the university,” she said. “But we also see the importance of protecting the best interests of college athletes and the consequences of a snafu causing a negative headline that will be tied to the university.

She explained further that their concern is about regulatory and public perception risks of NIL collectives established as 501(c)(3) organizations.

“If NIL collectives choose to go that route, they need to be aware of the additional regulatory burdens — including availability of IRS filings to the public and the public’s response to donors taking tax deductions to pay athletes large sums of money, she said. “As more states allow schools to be involved with NIL deals, schools could be more closely tied to the collectives, even if they’re not directly operating them. We want to make sure universities and the collectives have considered all of these items prior to formation of the collective.”

Fellow firm partner Ken Kurdziel, added a key piece of advice. “At a minimum, we recommend universities work with legal and tax counsel to draft an appropriate statement for the marketing materials and contribution receipts issued by the NIL collectives,” he said. “These materials would indicate that donors should seek advice from a tax professional regarding the deductibility of their donation as opposed to explicitly stating donations are tax deductible.”

Davis has recently been featured in multiple publications about this issue.

Extra Points with Matt Brown (link goes to a free registration page) questions whether NIL collectives should be organizing as nonprofits and whether they’ll be able to keep tax-exempt status. Katie also shared her thoughts on whether these collectives would meaningfully benefit from operating as a nonprofit. Specifically, she addressed annual regulatory requirements to retain tax-exempt status, public availability of information reported on 990 filings, and additional restrictions on collectives funded by just a handful of major donors.

Katie was also featured in the Business of College Sports NIL Collectives Insider (link goes to a paid registration page) offering in-depth advice about what NIL collectives need to know about organizing as a 501(c) tax-exempt entity. Advice she shared includes:

• Pros and cons of 501(c)(3) status
• Questions to have answered before pursuing designation
• Which collective model might best succeed as a charity
• Other options, such as 501(c)(6) designation
• Other issues to consider, such as unrelated business taxable income and excess benefit transactions.

“I highly recommend that athletics business officers and others collaborating with the NIL collectives subscribe to the NIL Collectives Insider put out by the Business of College Sports,” added Davis. “It includes great content that will help you stay informed on emerging issues from reputable sources.”

This information is not intended to be legal advice. You should consult your attorney and tax professionals before making any decisions.