The 501(c)(3) House of Cards has Been Toppled: Here Come the Audits?
“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—which is more than incidental to any exempt purpose furthered by the activity.”
“Whether Operation of an NIL Collective Furthers an Exempt Purpose Under Section 501(c)(3),” Internal Revenue Service Memo, dated May 23, 2023
And with that sentence, the IRS has changed the NIL industry…again. The idea that NIL collectives were going to pass scrutiny has been a hot topic and questioned by even our own experts. If you have been involved with a 501(c)(3) collective, you must read below to prepare for this change. The short answer is ALC has a solution to help.
I Run a 501(c)(3) Collective:
If you currently operate a 501(c)(3), be prepared for your status to be denied if you are currently applying or revoked before filing 2023 taxes. Prepare now for the tax implications of this revocation–do not wait until the letter comes. Additionally, the memo does not state whether the IRS will give any leeway to approve or pending approval to collectives regarding past revenue. Preparing for back taxes and penalties is prudent.
The likelihood of being audited is also likely, and what will become vital during this time will be recordkeeping. You will need to consider how to transition its governance structure to a corporation and keep detailed records of pre-revocation donations and post-revocation payments. Tech-enabled solutions like ALC, which prioritizes transparency and compliance, can support you during this transition.
I donate/ed to a 501(c)(3) collective:
Your donations should be considered tax-deductible up until the time that the collective receives notice of revocation; however, the IRS has not affirmatively stated that will be their approach. While the safest approach is to contact a tax expert immediately to see how this will impact your individual situation. You should also proactively communicate with the collective to keep track of the effective date of the revocation. Please keep this in mind, especially if you are auto-subscribing to any donation platform. You will want to make sure you have clear documentation of the transition date for your personal taxes. Additionally, it may be prudent to prepare to have all donations considered taxable so no surprises come your way later.
I am in an athletics department, and our collective is a 501(c)(3) collective:
If your university relied on a 501(c)(3) collective to support your NIL initiatives, you will need to begin acting today to stand up a new solution–NIL is too vital to your recruiting narrative to wait for a new external solution to be formed. ALC’s administration solution is a “walled-garden” approach to compliantly bring the university and student-athletes together to engage in NIL without violating NCAA guidelines, state laws, or even the pending federal laws.
The easiest path forward is reaching out to Athlete Licensing Company TODAY. ALC works with collectives, universities, and student-athletes to build, manage and grow comprehensive NIL programs that maximize opportunities while minimizing risks. Our team has broad and deep expertise–NCAA and NIL law, university fundraising, and athletic department administration– and our tech is based on 25+ years of IP rights management experience.
Contact ALC today at email@example.com
Win the NIL game.