The Internal Revenue Service made headlines on June 9 when SI reported the IRS released a memo stating that most Name, Image, and Likeness (NIL) Collectives are unlikely to qualify for 501(c)(3) tax-exempt status. In simple terms, donors cannot claim money given to a NIL Collective as a charitable donation on their taxes. 

Matt Brown turned his Extra Points newsletter over to Samantha Bowie, a law student at the Sandra Day O’Connor College of Law at Arizona State, to explain why collectives don’t qualify for nonprofit status. Bowie noted four criteria that must be met to reach 501(c)(3) status.

The news from the IRS wasn’t unexpected. Many people who operate collectives knew that meeting the standards to qualify for nonprofit status was unlikely. However, it immediately changed the game for collectives hoping to offer donors a tax write-off as an incentive to give to the collective.

“Most people have told us they won’t donate more than a couple thousand dollars at a time because it wouldn’t be a tax write-off,” one source currently part of operating a collective said.

“Honestly, if the only reason you’re giving is because of a tax write-off, how badly do we want your money? How much are you really about supporting the program,” another member on the board of a collective said. “We all have some skin in the game. However, I’m not the one giving $10,000, so it’s hard for me to understand.”

Everyone would focus on how the athlete would benefit from a donation in an ideal world, but this isn’t a perfect world. Many people want something in return, whether a tax write-off or something of equal value in return.

Bowie noted in the Extra Points newsletter that the memo is not an official position from the IRS but is persuasive. She advised collectives operating as a nonprofit to pause donations and consult a tax lawyer.

Congress could settle this by passing a bipartisan bill that mirrors the same opinion as the IRS memo. However, that would require some level of cooperation.

So, what can a NIL Collective do right now? If you operate strictly as a nonprofit, follow Bowie’s advice and consult with a tax lawyer immediately.

What about the collectives relying on donors that give smaller amounts of money?

“Our school doesn’t have a ton of lawyers or doctors,” said one member of a collective that was operating as an LLC while waiting for IRS guidance. “The people that can’t give a thousand dollars but can give $100, or whatever they can give, every month or two. For us, it’s about tapping into that donor base moving forward.”

A collective that operates as an LLC will have certain tax liabilities that would’ve been avoided as a nonprofit. To better understand the taxes facing an LLC, I contacted an attorney that primarily works with businesses that operate as LLCs. He requested anonymity.

The attorney explained that an LLC with multiple members, or owners, is likely to be taxed as a partnership, which is the default.

“For example, if both of us were to have an equal share of ownership in a collective and we raised $100,000, then we’d each report $50,000 on a Schedule K-1 (Form 1065),” the attorney said.

Another complication for a collective operating as an LLC is the athletes would likely receive a 1099-MISC from the collective, which the athlete would be required to report on their taxes.

Athletes that receive more than $600 from a collective during a calendar year must report their earnings to the IRS and pay taxes on that money. According to the attorney, the other option would be giving the athlete a W-2, making the athlete an employee. It’s unlikely that athletes will be considered employees.

“The tax folks maybe haven’t caught up on everything happening with NIL,” the attorney noted. “We may see more changes in the future because the IRS has been slow to react.”

Many I spoke to for this piece mentioned they have or will be hiring a Certified Public Accountant to handle the collective’s taxes due to the uncertainty from the business and legal side.

The future of NIL remains uncertain. The United States Congress will likely be forced to act soon to standardize rules and regulations and has faced multiple calls to intervene. Until then, the people who operate NIL Collectives are left to react to the blowing winds of regulation changes.