With the recent Supreme Court decision in NCAA v Alston (decided June 21, 2021), student athletes may now capitalize on their name, image and likeness (NIL), similar to professional athletes. Depending on the annual revenue, athletes may need to engage in complex and sophisticated business and tax planning, as this income, along with associated deductions, must be reported on federal and state tax returns.
The first major issue involves state income taxes. The default rule is that a student’s residence is where they lived before attending college; thus, a student living in California (a high-tax state) who plays football for the University of Miami (a no-tax state), will be taxed as a California resident, even though they are living in Florida. The athlete may change residence to Florida, but there are detailed steps to this process, including, in most cases, a waiting period and a showing of financial independence.
Student athletes earning NIL money are treated just like anyone else. This means reporting and paying taxes on the income and the potential for being sued; therefore, they should consider forming a limited liability company (LLC) or corporation for asset protection. Depending on the future earnings and whether the athlete wants to grow their brand, a traditional C corporation may be the best tax-planning option. Keep in mind that if you are coaching someone and they are injured, you could be liable for damages, that’s why you want to have a limited liability entity handling your business affairs. Another realm for potential legal liability is intellectual property (including trademark) infringements and contract disputes.
Even if an athlete successfully changes residence to Florida, many states will tax income derived from being physically present in that state. For instance, if the Florida resident comes to California for an autograph signing event, California could tax the revenue because the athlete was physically present in the state earning income.
Also, watch out for in-kind payments: the car dealer who gives the athlete a car – the value of the car is considered income so unless there are other sources of income to pay the taxes on this income, they could have a large tax liability without the funds to pay it. This applies to many types of non-cash property and benefits, such as non-business-related airline flights, hotels and meals, gift bags, clothing and assorted bling.
Although not a tax issue, to successfully capitalized on your NIL, consider the advice David Grohl (Foo Fighters) received to grow his fortune to more than $300 million. The story goes that he asked Paul McCarthy (Beatles) how to prosper in his musical career and was told never to sell anything he created1 and retain total control over every revenue source, especially his musical catalog. The lesson: never, ever, sell or transfer any ownership of your NIL, always license it.
Conclusion: Capitalizing on your NIL is fraught with potential pitfalls and traps. Obtain the best tax and legal advice before moving forward. Protect yourself with a limited liability entity (an LLC or corporation) and always retain full ownership and control of your NIL.
1 The Beatles music catalog was sold to Michael Jackson in 1985 for $47.5 million. It is now currently worth around one billion.