Business of Tax: College Athletes Risk Tax Red Flags After NCAA’s Shift

February 28th, 2024 Off

By Jonathan Curry

College athletes now have the opportunity to earn money through endorsements and the use of their likenesses, but they might not be prepared for the tax hit coming around the corner.

Tax professionals agree that the rules for college athletes using their name, image, or likeness (NIL) to earn income aren’t any different than those for professional athletes, or even taxpayers more broadly. However, the players’ inexperience with tax matters generally and the tricky tax rules surrounding endorsement income mean they could be blindsided by unexpected tax bills.

“For many of the college athletes receiving cash or noncash compensation, this is going to be the first time they ever file a tax return,” observed John Karaffa of ProSport CPA PLLC. “Some of them could have a very rude awakening if they didn’t reserve money to pay the tax on the income they’ve got coming in.”

The NCAA’s Division I board of directors adopted a rule providing that beginning July 1, it would temporarily end restrictions that prohibit college athletes from making money off the use of their NIL.
That rule change has been a long time coming. In October 2019 the NCAA’s overall board of governors unanimously agreed to begin the process of overhauling its NIL rules, and it directed each of the three NCAA divisions to set rules by January 2021 providing a framework for athletes to receive endorsement money.

But in January the NCAA’s Division I Council punted on that deadline, citing concerns that such a rule could raise antitrust implications. That eventually led to the adoption of the July 1 interim rule, buying the NCAA time while it waits for Congress to provide uniform standards.

Passing the Buck
For now, the NCAA is largely handing off the burden of navigating these tax challenges to the players. Athletic departments across the country have posted notices on the NIL change, advising student-athletes that their NIL income is taxable and urging them to contact a tax professional for advice.

Christine M. Colwell of Breazeale, Sachse & Wilson LLP told Tax Notes that while the NCAA decision ends its prohibition against players monetizing their NIL, the organization essentially left a legal vacuum for state legislatures and universities — and eventually Congress — to fill.

Some states passed legislation in advance of the NCAA’s decision providing some guidance on what kinds of NIL deals are appropriate for student-athletes, but in states without legislation, it’s up to the individual schools or conferences to write and enforce their own policies, Colwell said.

Katie Davis of James Moore & Co. observed that some states’ new NIL laws require schools to offer financial literacy education as part of their athletic program. The LEGACY program at DePaul University, for example, aims to assist players as they “advance their personal brand [and] enhance their financial literacy” through training sessions on opportunities for branding, according to its website.

Davis noted that her own accounting firm has already begun working with universities to develop educational content on that front. “Most schools have already hired or are in the process of hiring third-party NIL consultants who help to facilitate the education,” she added.

The Supreme Court’s June decision in National Collegiate Athletic Association v. Alston, Sup. Ct. Dkt. No. 20-512 (2021), wasn’t directly related to NIL, but Colwell said she suspected that it was the “final push” that forced the NCAA to cave on allowing students to profit from their NIL. She predicted that the Supreme Court’s decision was only the beginning of the NCAA’s reforms, and said it “opened the door to completely change the model of collegiate athletics as we know it.”

New Considerations
Even before the NCAA’s NIL change, student-athletes needed to be aware that some types of financial aid, like stipends or money for room and board, are considered taxable income. As a practical matter, however, those athletes were often either ignorant of that rule or purposefully ignored it, and after factoring in the standard deduction, the amounts still taxable were often minuscule, according to Tim Johnson of JLK Rosenberger LLP.

But if those athletes add another $10,000 or $20,000 in endorsement income, it starts to add up and become a bigger issue, Johnson continued. “People were just turning a blind eye to it before, but when you get someone like myself involved with it that actually knows the rules on it, they’re not going to like what I tell them,” he said.

Another unexpected consequence of the NIL streams of income for some players is that as taxable income, it could jeopardize their eligibility for need-based financial aid from the school, Colwell observed. That could cause some players to reconsider whether it’s ultimately worth it to profit from an NIL deal, she said.

Davis predicted that the trickiest aspect of tax advice for many players will be state and local tax issues, such as if an athlete’s residence is in one state but he attends school in another state and performs endorsement activities in additional states, triggering tax obligations in each state. Those kinds of activities can include everything from sponsorships and promoting products on social media to making cameo appearances at a grand opening event, she said.

How players are compensated can also vary greatly. Besides ordinary cash income from these deals, players might be compensated with noncash items like clothing, food, sports equipment, cars, or discounts on products — and that noncash compensation is taxable income as well, Davis said.

Deducing Deductions
The NCAA’s decision led to a flurry of endorsement deals and other player branding announcements July 1. Predictably, the college athlete superstars — those who are functionally the face of their teams — were among the first to ink deals.

University of Georgia running back Kendall Milton announced his own personal brand, KM2. University of Miami quarterback D’Eriq King was the first on his team to sign a sponsorship deal in exchange for promoting two companies, the moving company College Hunks Hauling Junk & Moving and local car dealership franchise Murphy Auto Group. According to the Miami Herald, King received a combined $10,000 signing bonus from the two companies, with monthly compensation to follow.

But it’s not just the elite athletes who are cornering the new market. Johnson noted, for example, that the twins Haley and Hanna Cavinder — college basketball players at California State University, Fresno — have found fame as entertainers by accruing a substantial social media following on TikTok and Instagram and are now free to monetize it. The twins immediately capitalized on their following by signing endorsement deals with Boost Mobile and Six Star Pro Nutrition.

That new source of income comes with lots of questions about what kinds of expenses associated with branding and endorsement income are deductible.

Johnson observed that student-athletes monetizing their social media following might get paid for promoting an ad, but to build that following, they might decide they need to take exciting photos, and to take those photos, they might need to travel. That raises the question of what expenses along the way are deductible, he said.

“There’s a lot of gray area in that,” Johnson said. “What’s ordinary and reasonable, and what’s necessary? It’s going to put us as practitioners in a tough spot, for sure.”

The IRS rules on allowable business expenses for someone earning income as a contractor are well established at this point, according to Karaffa. “It’s situation-specific. . . . You’ve got to be able to justify the direct linkage of the expense and the income,” he said.

However, Karaffa added, every situation is different. His approach is to advise student-athletes to “spend money on what they feel they need to spend money on to generate more income, then let us figure out what will end up being deductible, what we can support, based on their situation.”

Although college athletes might be initially caught off guard by the tax ramifications of their new endorsement deals, Karaffa emphasized that it’s better for them to learn the financial lessons sooner rather than later.

“It’s much better to learn the ropes about personal finances and taxes when they’re earning $20,000 or $50,000, as opposed to potentially making mistakes when there are checks with another zero or two at the end,” Karaffa said. “I hope it does raise the financial acumen of college athletes nationwide.

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