NIL Contributions: Are They Eligible for Tax Deductions?

Recently, one of our clients, a business owner, approached us. His daughter, a talented volleyball player, earned a full athletic scholarship for college, but it didn’t kick in until her sophomore year.

This got us wondering:

Are there any special tax rules that might let our client’s business cover his daughter’s freshman year tuition as a deductible expense?

In our quest for answers, we stumbled upon something called name, image, and likeness (NIL) contracts. Now, if you’re a parent of a student-athlete, you might be curious if you can enter into a NIL contract with your child and write off the payments – either as a business expense or a charitable donation.

You might have seen this tax strategy floating around on social media. But, like all tax advice from the internet, it’s important to approach it cautiously.

In this article, we’ll break down the NIL contribution and tax implications and give you the lowdown before you jump into these contracts.

What Are NIL Contributions?

Before July 2021, the NCAA said no to student-athletes making money from their name, image, or likeness for business.

Now, because of lawsuits and new laws, NCAA says yes. Students can sign NIL contracts and still play college sports. But, they can’t get paid to play or for joining a team improperly.

So, college athletes can now do NIL stuff as long as it’s legal where their school is. This includes signing autographs, endorsing products, teaching at camps, and posting on social media. These contracts let them make money while they’re still in college sports.

Can You Get Tax Deductions for NIL Donations?

NIL payments can be made in different ways. Let’s see how you can make these payments and what taxes are involved.

Paying to NIL Groups

NIL groups gather money from supporters to help student-athletes. They are often started by alumni and supporters, collecting funds from many donors and businesses. These groups assist athletes with NIL deals and provide benefits to them or their families.

In the past, some of these groups were set up as nonprofit organizations (501(c)(3)), making donations tax-deductible. But in June 2023, the IRS released a memo (AM 2023-004) saying that donations to NIL groups aren’t tax-deductible. This is because the benefits given to student-athletes aren’t just a small part of the group’s mission.

This memo suggests that the IRS might not grant nonprofit status to new NIL contributions groups and could even take it away from existing ones during audits.

Can You Deduct NIL Payments as Business Expenses?

From a business standpoint, signing an NIL contributions with a student-athlete has its perks. Think of it like this: a local health food store pays a student-athlete to promote their products on social media, show up on billboards, or make appearances in-store. It’s all about boosting brand recognition, building a good image, and standing out from competitors.

Now, when a business makes these NIL payments to a student-athlete, whether they can be deducted as business expenses depends on a few things. You’ve got to consider the type of business, the purpose of the payments, and the tax laws that apply.

Here are some questions to help you figure out if you can write off NIL payments as business expenses.

Can You Deduct NIL Donations on Your Taxes?

In simple terms, to get a tax deduction, your expenses need to be common and helpful for your business.

For example, if you’re a health food store, sponsoring a student-athlete’s social media post could be seen as a common and helpful expense. But if you’re a management consultant, it might not be considered the same way by the IRS.

So, whether your NIL payments are tax deductible depends on your business and how the IRS views it.

Have you documented your NIL donations properly?

To claim tax deductions, businesses need proper records. Keep contracts, invoices, and other proof of payment to show the expense’s business purpose and commercial nature.

Following the Rules for Ads and Endorsements

Companies must follow advertising rules from organizations like the FTC. If someone promotes a product on social media and has a financial or personal connection to the brand, they must disclose it. Not following these rules might affect NIL payment deductions and lead to legal issues.

Understanding Local Tax Laws

Tax laws differ by location, so know your area’s rules. Check your state’s and the student-athlete’s school’s regulations or consult a tax expert who knows your local tax laws.

Is NIL Payment Considered an Arms-Length Transaction?

The IRS closely examines transactions involving family members. For instance, if a parent sells a house to their adult child, is it truly a sale or just a disguised gift? When a parent hires their child for their business, is the child paid a fair wage or just a way to deduct personal expenses?

If your NIL contract is with an unrelated student-athlete, no worries. But if it’s with a family member (sibling, spouse, child, etc.), ensure the payment is reasonable and matches fair market value. This can be tough with the IRS, especially if your child isn’t a top athlete or lacks a big following.

Let’s use an example to understand if NIL donations can be tax-deductible.

Meet Dr. John Smith, who owns a dermatology practice called Dr. Smith, MD, PC. His daughter, Sophia, is a college volleyball player without a scholarship.

Dr. Smith wants to use NIL payments to help pay for Sophia’s college tuition. But can he claim these payments as a tax deduction if the IRS audits his business?

Here are some questions an auditor might ask:

Were these payments necessary for the business, and did they involve marketing and promotional work by Sophia? Is this kind of work common in the industry?

Was this a fair transaction? Did Sophia provide valuable services, and was her pay reasonable?

Did Dr. Smith’s business keep proper records? Is there a contract in place, and were Sophia’s hours and services documented for a legitimate business purpose?

If Dr. Smith’s business never did this type of marketing before and paid Sophia much more than what’s typical for NIL contracts, the IRS auditor might think he’s trying to disguise tuition expenses as business expenses, and the deduction could be denied.

NIL payments could potentially be tax-deductible, but they’re new and not yet well-tested. So, it’s crucial to understand the tax implications before deducting them.