In late June, NCAA athletes across the country had essentially no way of participating in college track and field profits. A landscape that had lasted for decades changed within a few days. Following a stringent opinion from the US Supreme Court and just before several state student and athlete compensation laws went into effect, the NCAA announced that its athletes can make money using their names, images, and likeness.
Many student athletes, tax consultants and other professionals from the sports and entertainment industry are now considering how they can make the most of these new opportunities. There are important considerations beyond tax law, including securing brands, developing a brand, and maximizing the role of TikTok, Instagram, and other social media platforms, and whether to request or accept cryptocurrency payments. However, tax laws should be part of the initial business discussion as they affect how athletes should structure a business to manage their earnings and use deductions.
Structuring a business unit
The default option is sole proprietorship if athletes want to report their income as part of their standard income tax return. However, this standard does not provide asset protection, business structure, and is listed on Appendix C, which can be one of the most intensely vetted parts of Form 1040 by the Internal Revenue Service due to the blurring of personal and business expenses.
For these reasons, many student-athletes will be better served by starting a business unit or a company. The best options for tax purposes are likely to be a partnership, an S corporation, or a C corporation. The first two allow everything the athletes earn to flow on to them for tax purposes. There are benefits to them including the reporting of business deductions by the companies and the creation of bank accounts with their own expenses that are accounted for aside from the activities of the athletes as individual taxpayers. Some may also be eligible for a 20% pass-through company deduction.
C Corporations, on the other hand, pay the lowest upfront taxes at 21%. But they have double taxation, where distributions are taxed at an additional 15%. The strategic decision at C Corporations depends on whether the athletes plan to take money out of the company on a regular basis or to reinvest their earnings. If an extensive distribution of the money is planned, the double taxation largely eliminates the benefit of the lower C corporate tax rate. However, some athletes will prefer to keep the revenues within the company as a means of additional branding or other business activities. In that case, a C corporation can be a good option.
Maximizing the deductions
Athletes and their accountants will also want to work through what tax deductions are possible based on their business activity. Student athletes can deduct normal and necessary business expenses, which may include work-related travel, equipment, training, coaching, and insurance premiums, among other things. This is a complex area that requires careful scrutiny of the allowable spending. It is important to keep meticulous records and substantiate the business purpose of any deduction claimed.
College athletes earning income in different states are required to file multiple state income tax returns that reflect the proper linkage and breakdown. In addition, various city, county, and local taxes may be levied on the activities. This creates a burden of keeping careful records of trips, team plans, and event plans. Athletes who want to earn a large part of their income in the federal states of their universities can take these considerations into account when deciding on admission. For example, from a tax perspective, a Florida resident athlete can benefit from attending the University of Florida through UCLA if the latter exposes them to high state income tax.
College athletes should consider the retirement plan options available. These options differ depending on whether the athlete is treated as a self-employed or an employee. An athlete is considered to be self-employed if he or she pursues a trade as a sole trader, self-employed entrepreneur or as a member of a partnership that practices a trade or business. If the athlete forms a C corporation or S corporation, he may be treated as an employee of the company. Because of the complexity, athletes should consult with retirement planning specialists.
Keeping pace with evolving guidelines
As mentioned earlier, the business landscape for NCAA athletes has changed rapidly, and there are still open questions about taxes and other important areas. The NCAA itself recognizes the need for further guidance.
“Given the multitude of statewide laws that have been passed across the country, we will continue to work with Congress to develop a solution that provides clarity at the national level,” said NCAA President Mark Emmert in a press release in the The NCAA’s interim plan was announced. “The current environment – both legal and legal – prevents us from offering a more permanent solution and the level of detail that student athletes deserve.”
Now that athletes in every state have the go-ahead, even states like Georgia, which have already put naming, image, and similitude laws in place, can revise theirs if the field changes. Universities and conferences can also set their own reporting requirements and issue additional guidelines, according to the NCAA.
Next-step oversight by state and federal lawmakers, courts, the NCAA, conferences, and schools will be critical to ensuring that student athletes get the most out of their new opportunities without losing their athletic or academic credentials.
This column does not necessarily represent the opinion of the Bureau of National Affairs, Inc. or its owners.
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