The NCAA has adopted rules governing NIL and NIL Collectives. You can find guidance at Name, Image and Likeness Income. To help student-athletes navigate the NIL environment, the NCAA introduced NCAA NIL Assist, a NIL platform in collaboration with Teamworks, to serve as a centralized source for student-athletes to understand and make informed decisions about NIL.

Collectives come in various forms, but the most common are marketplace collectives, donor-driven collectives, and dual collectives. Marketplace collectives are organizations that create a meeting place for athletes and businesses to connect and create opportunities. Donor-driven collectives pool together booster and supporter funds and create opportunities for athletes to give money back to them. Dual collectives have features of both.

While many NIL collectives have been formed as for-profit entities, others have been formed as nonprofits. Numerous nonprofit collectives have, in turn, sought and obtained Internal Revenue Code (IRC) § 501(c)(3) tax exempt status from the IRS, which potentially allows donors to receive a tax deduction for their contribution to the collective.

Some NIL collectives provide tax assistance or refer athletes to particular preparers. Be cautious on preparers affiliated with NIL collectives, they may have conflicts of interest.

Numerous nonprofit collectives have sought and obtained IRC § 501(c)(3) tax-exempt status from the IRS. To be designated as an exempt organization the collective must first file Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. The collective will then receive a determination letter from the IRS notifying it if it is exempt from federal income tax and whether it is classified as a private foundation or less likely, a public charity. You can search for information about an organization’s tax-exempt status and filings on IRS’s Tax-Exempt Organization Search.

Tax-exempt collectives typically use student-athletes as independent contractors to further a purported exempt purpose. For example, some provide in-kind contributions of a student-athlete’s services to other tax-exempt organizations, including speaking, appearances, and other public relations services that help expand the organization’s reach and visibility in their communities. The student-athlete is paid by the tax-exempt collective to provide the services.

When working with NIL collectives, especially those claiming exempt status, taxpayers should ensure that payments received are appropriately reported. Preparers who mischaracterize NIL payments from collectives as nontaxable or treat them as charitable awards may be engaging in preparer misconduct.

Collectives that obtain a tax exemption should be mindful of special rules that apply to tax-exempt entities. The organization must not be organized or operated for the benefit of private interests, and no part of an IRC § 501(c)(3) organization’s net earnings may inure to the benefit of any private shareholder or individual. If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any organization managers agreeing to the transaction.

If a non-profit NIL collective engages in an activity, that does not constitute a permissible purpose for a tax-exempt organization; the IRS could tax revenues from this activity as unrelated business income, i.e., income from a trade or business, regularly carried on, that is not substantially related to the collective’s exempt purpose.

If the IRS finds that the tax-exempt NIL Collective’s activities constitute a primary or substantial non-exempt purpose of the organization, the IRS could revoke its tax-exempt status. The entity could then be liable for taxes on its income.

IRS’s Chief Counsel’s memo of June 9, 2023 concluded “an organization that develops paid NIL opportunities for student-athletes will, in many cases, be operating for a substantial nonexempt purpose—serving the private interests of student-athletes.”  

For-profit NIL collectives are typically registered as an LLC – a limited liability company, on Form 8832, Entity Classification. It is a structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.

Unlike nonprofits, for-profit LLCs are not subject to a cap on what’s considered reasonable compensation. They may therefore offer student-athletes NIL work at any compensation structure. They are also not subject to limitations on the type of activities they can facilitate. Therefore, for-profit LLCs may facilitate NIL arrangements for student-athletes such as merchandising or endorsement deals that promote commercial activities.

The Taxpayer Advocate Service is an independent organization within the IRS. TAS helps taxpayers resolve problems with the IRS, makes administrative and legislative recommendations to prevent or correct the problems, and protects taxpayer rights. TAS helps all taxpayers (and their representatives), including individuals, businesses, and exempt organizations. You may be eligible for free TAS help if your IRS problem is causing financial difficulty, if you’ve tried and been unable to resolve your issue with the IRS, or if you believe an IRS system, process, or procedure just isn’t working as it should.  

 TAS has offices in every state, the District of Columbia, and Puerto Rico. To find your local advocate’s number: 

• Visit www.TaxpayerAdvocate.irs.gov/contact-us; 
• Check your local directory; or 
• Call TAS toll-free at 877-777-4778. 

Low Income Taxpayer Clinics (LITCs) assist individuals whose income is below a certain level who need to resolve tax problems with the IRS. They also provide education, outreach, and information on taxpayer rights to individuals who speak English as a second language. LITCs represent taxpayers in disputes before the IRS and courts and help taxpayers respond to IRS notices and correct account problems. Services are offered for free or a small fee. LITCs are independent from the IRS and TAS. For more information or to find an LITC near you, see the LITC Page or Publication 4134, Low Income Taxpayer Clinic List. You can also request Pub. 4134 by calling 800-TAX-FORM (800-829-3676).