Athletes in NIL deals need to review tax issues - Albuquerque Journal

Athletes in NIL deals need to review tax issues

I have had a surprising number of requests to write more about name-image-likeness (NIL) payments for college athletes. This is a developing area, so the topic may be one that keeps on giving.

Let’s start with background. In 2021 the Supreme Court upheld a District Court and Ninth Circuit holding that the NCAA had violated the Sherman Act in restricting education-related benefits received by athletes.

The lower court decisions upheld NCAA limits on payments (e.g., scholarships) related to athletic performance at the member institution. It was the ability to earn for non-athletic performance that was at issue. We now sweep these earnings into a broad category called NIL.

Because it was the NCAA that appealed to the Supreme Court, and the NCAA wanted the limits on athletic performance earnings to stand, the court limited its analysis to the NIL category.

The NCAA contended it was exempt from antitrust (Sherman Act) law because it was not a commercial enterprise. The court held that the Sherman Act did not allow a carve-out for special status enterprises.

The NCAA contended its member institutions agreed to the rules, so that the members had a joint venture. The court held that the NCAA exercised monopoly power that subjected it to antitrust law.

The Supreme Court holding was unanimous. Justice Gorsuch wrote the opinion. The NCAA limit on education-related benefits was struck down.

Justice Kavanaugh wrote a separate concurring opinion. He said that the limit on payments for athletic-related performance should also be subject to antitrust law.

A future challenge may bring the NCAA earnings restrictions upheld by the District Court and Ninth Circuit, and not considered by the Supreme Court, under Supreme scrutiny.

But the 2021 holding caused the NCAA to issue interim guidance allowing student athletes to earn payments for NIL. Athletes may also engage professional representation.

NIL may include commercial endorsement payments, payments from social media, payments for private lessons, for running camps, and so on.

NCAA interim guidance provides that the athlete’s NIL arrangement cannot conflict with any institutional (team) contract. Payments must be disclosed to the institution.

Most states have enacted NIL laws. Senate Bill 94, effective July 2021, applies in New Mexico. It prohibits earnings during official team activities.

Because earnings for athletic performance remain prohibited, NIL payments would be expected to be with third parties with the athlete being self-employed.

Earnings from self-employment raise many tax issues. The obvious is income tax liabilities, the less obvious is self-employment tax liabilities.

The self-employed athlete will need to plan for quarterly estimated payments for federal and state. His or her parent may lose a child credit or education credits available only for dependents.

A New Mexico athlete will need to consider gross receipts tax liability. This will require filing with the state on a frequency determined by receipts.

Professional athletes are paid for athletic performance. Because performances cross state lines, professionals must consider liability in multiple states.

NIL may be less likely to trigger multiple state tax filings because it is, in theory, not for athletic performance.

However, NIL services may still be attributable to different jurisdictions. Commercial endorsements may be traced to different jurisdictions.

A New Mexico athlete working at a camp in California would clearly become subject to California tax. Hitting the summer camp road trips can trigger multiple tax headaches.

The self-employed athlete should consider establishing a simplified employee pension (SEP). Contributions are tax deductible.

Traditional IRA contributions or Roth IRA contributions are also on the table. The athlete really needs a professional tax adviser in addition to representation to negotiate NIL deals.

As a tax adviser I believe that the tax issues facing a NIL athlete are simpler than the representation issues. Applying the tax laws to the self-employed is a common concern of tax professionals.

Negotiating NIL deals is a new thing. Trial by combat will be how most advisers learn the ropes. And the market for NIL deals will be segmented by sport and by conference affiliation.

Seeking a professional representative will be looking for Clint Eastwood’s “Il Buono” character from “The Good, the Bad, and the Ugly.”

Things may be both bad and ugly before they become good in the NIL market.

James R. Hamill is the director of tax practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at<br>

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