Paid student-athletes: Tax implications for universities and donors

Three letters have already dramatically changed college sports: NIL (name, image, and likeness), referring to student–athletes’ attributes for which they now may be compensated under National Collegiate Athletic Association (NCAA) rules.¹ However the biggest change may be right around the corner, with universities being allowed to pay student–athletes directly. These developments have significant implications for athletes, donors, and universities, especially when combined with the launch of the NCAA transfer portal, which enables student–athletes to transfer more easily from one school to another. This article summarizes these important changes and points out some of the yet–to–be–determined tax implications for universities and donors.

How did we get here? The background

NIL and contributions

On June 30, 2021, responding to legal developments, the NCAA released what was then described as an interim policy, in which the NCAA expressly recognized the legitimacy of student–athletes receiving NIL payments.² Under the policy, schools cannot make the NIL payments directly.³ To bring some control to the payments offered to athletes, university donors formed NIL collectives. Many of these collectives were organized to qualify as Sec. 501(c)(3) tax–exempt organizations. Recognizing that the purpose of these collectives is simply to pay student–athletes, i.e., the goal is private gain, the Chief Counsel of the IRS responded quickly and made it clear that NIL collectives do not qualify for tax–exempt status.⁴

For many donors, the disallowance of exempt status has significant financial implications. While donors may want to provide the cash necessary to lure elite athletes to a particular school, they also want the tax savings typically associated with university contributions. This concern must necessarily be on the radar of universities that want to motivate maximum contributions from donors. However, as it stands right now, donors can either make a tax–deductible donation to their favorite school or make a non–tax–deductible contribution to the NIL collective that will support their favorite sports programs.

Revenue sharing and paid student-athletes

In a recent development following a series of legal actions, e.g., House v. NCAA⁵and Carter v. NCAA,⁶ a settlement agreement was reached between the college sport stakeholders, including the NCAA, universities, and players, that will allow revenue sharing with student–athletes.⁷ The class–action lawsuits asserted various antitrust claims against the NCAA and major collegiate athletic conferences for forbidding student–athletes from receiving compensation. The lawsuits sought monetary damages on behalf of recent past college athletes and revenue sharing for current and future athletes.

The terms of the settlement, which, as of this writing, still needs a judge’s final approval, are quite detailed and extensive. However, there are several key components of it that are of particular interest.

First, the settlement does not include all member institutions equally. The NCAA has more than 1,000 member schools, and this agreement extends only to schools with Division I athletics, looking both back and forward.

Second, looking back, awards will be made primarily to football and basketball players in the “Power Five + 1” schools, those in the Big Ten, Big 12, Pac–12, Atlantic Coast, and Southeastern conferences and the University of Notre Dame.⁸ This sets the tone that schools and their sports will receive different levels of resources under this settlement. Further, the awards to prior athletes are described as covering 67.4% of estimated NIL damages and 31.6% of estimated damages for athletic services claims. This latter provision is particularly important, as it reflects the recognition that student–athletes should be paid for their services as athletes, directly contradicting their previously highly guarded status as amateurs.

Third, looking forward, the settlement greatly expands the payments to student–athletes over the next 10 years, with the NCAA expressly authorizing compensation payments based on revenue sharing. Specifically, every Division I school can pay its student–athletes an amount equivalent to 22% of the average athletic revenues of the Power Five schools, referred to as the “pool” amount. This translates to more than $20 million in available pool payments in year 1 of the 10–year injunction relief term. Additionally, the agreement provides that students can continue to receive third–party NIL payments and traditional scholarship awards. The settlement acknowledges that this agreement is revolutionary and that it greatly increases the compensation that universities may pay student–athletes.

The full consequence of this settlement has yet to be determined. For example, the question has been raised whether the agreement is consistent with Title IX because most of the financial benefits go to men’s football and basketball players.⁹

The focus here, however, is on taxation. This article next discusses how these recent changes affect the NIL collectives and the potential tax implications, for universities and donors, associated with paying student–athletes.

Professional student-athletes: Why should schools care?

The future of NIL collectives

The total funds held by the NIL collectives are quite dramatic, particularly considering the newness of these organizations. Ranking the top 50 football NIL collectives by school, as of the end of the 2022 season, the University of Memphis ranked 50th with $170 million. Forty–seven, 36, 22, and 14 football programs had bankrolled in excess of $200 million, $300 million, $400 million, and $500 million, respectively. The University of Oregon topped the list with $969 million.¹⁰

However, the annual payments these NIL collectives made to athletes are significantly less. Ohio State University has received much attention for its $20 million roster in 2024.¹¹ Moving forward with predictions for 2025, the University of Texas is expected to top the list of payments from NIL collectives, with a $22.2 million payroll, with Ohio State coming in second at $20.2 million, Louisiana State University third at $20.1 million, the University of Georgia fourth at $18.3 million, and Texas A&M University fifth at $17.2 million. Only the top 20 football programs are expected to have NIL collective payments in excess of $10 million.¹²

Comparing the schools’ NIL collective payrolls to the revenue–sharing pool seemingly presents an opportunity for many schools. Specifically, many smaller Division I schools may be able to eliminate or at least minimize their NIL collectives. Schools that expect to pay their athletes less than the $20 million–plus allowable pool amount can compensate their athletes directly. Without having to contribute funds to the collectives, donors may be able to go back to donating directly to the schools, providing alumni with much–appreciated tax savings, which may translate into greater donations.

For many of the larger schools, eliminating the NIL collectives may not be possible. The pool maximum applies to all Division I schools. Some of the larger schools are at or near the maximum amount when considering just the football team. However, these larger schools now effectively have two tools, the revenue–sharing pool and the collective’s NIL payments. In other words, schools may be able to increase the deduction opportunities for donors to fund the pool payroll while sharing the burden with third–party NILs. The settlement agreement expands the funding opportunities for the larger sports programs that have a substantial student–athlete payroll.

However, these developments raise some novel tax questions for universities and donors, as discussed next.

The future of tax-exempt college sports

The Internal Revenue Code recognizes education as an exempt function. But what about sports? One could argue that developing athletic ability contributes to the education of our youth. However, that argument has not been necessary for quite some time. Since 1976, Sec. 501(c)(3) has provided that exempt activities include “educational purposes, or to foster national or international amateur sports competition.” Therefore, on their own merits, college sports programs are exempt from tax because they foster amateur sports competition.

With the implementation of the settlement pool system, many schools will still have unpaid student–athletes, i.e., amateurs. This should include all those schools outside the settlement, i.e., non—Division I schools and Division I schools that decide to not compensate their athletes. The pool payments are not mandatory. As things stand now, these programs would remain tax–exempt as supporters of amateur sports.

However, many schools will embrace the pool payroll allowance and will compensate their athletes following the final approval of the settlement. This then generates the following question:

What happens when student-athletes are paid to play college sports?

With paid student–athletes, practitioners must evaluate each sports program and consider whether its income is at risk of classification as unrelated business taxable income (UBTI). UBTI is income from a regularly operated trade or business activity that is unrelated to the organization’s charitable function.¹³ Both public and private schools are subject to federal income tax on their UBTI. The taxing of UBTI is effectively a compromise for those organizations that have both exempt and nonexempt functions. Rather than their being fully tax–exempt or fully subject to tax, the taxation of just the UBTI preserves the organization’s exempt status while taxing only the nonexempt activity.

Following the settlement, there are two possible paths forward for those sports programs with paid student–athletes: Either the program will remain tax–exempt because of its connection to the school’s educational mission, or some portion of the sports program will be identified as generating UBTI. In the latter case, tax practitioners would face a tremendous burden, tasked with the responsibility of identifying those expenses that are directly related to the UBTI to determine the annual tax burden. There are some critical issues that practitioners should consider when evaluating which, if any, college sports programs will be classified as generating UBTI.

One such issue is that if all the athletes in a particular sports program are paid, then the program should no longer be labeled as amateur sports. These athletes are effectively professional, minor–league athletes. Since the program no longer supports amateur sports competition, practitioners should consider whether the program in question will be classified as generating UBTI. Without supporting amateur sports, this issue will largely depend on whether the perceived purpose of the sports program is “not substantially related … to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501.”¹⁴

Prior to 1976, Sec. 501(c)(3) did not include amateur sports in its listing of exempt functions.¹⁵ In other words, prior to 1976, college sports were exempt from taxation based on their association with the universities, supporting their educational mission. Therefore, there is some history to support the proposition that college sports should remain tax–exempt even if student–athletes are paid. After all, universities pay professors, coaches, trainers, tutors, and so forth. Could it really be that the tax–exempt status of all college sports depends on one group of individuals remaining unpaid — the student–athletes? Considering the pre–1976 historical tax–exemption, college sports programs may remain tax–exempt even with all paid athletes. However, unless Congress adds some new language to Sec. 501(c)(3) to clearly define college athletics as an exempt activity, there is some uncertainty that all college athletics will remain fully tax–exempt.

Second, if at least some student–athletes on a team do not receive compensation, does the program “foster … amateur sports competition”? Would it matter if there were only a few paid athletes or only a few amateurs? What if a team with paid student–athletes plays a team with all amateurs? These questions may seem absurd, but the current statutory language may make them relevant to tax–exempt status. Again, without some statutory clarification, schools face uncertainty in determining exempt versus UBTI classification as they implement the settlement’s 10–year pool compensation.

Third, perhaps the greatest risk factor for UBTI classification is the elephant in the room, the money. College sports is big business, much more so than before 1976. For 2023, the Power Five conferences brought in $3.55 billion in revenue.¹⁶ Following the success of the now 12–team College Football Playoff, it is not unreasonable to expect that broadcast and merchandising revenue will remain strong.

However, generating revenue does not mean that the program is generating profit for the university. The NCAA has examined the profitability of sports programs.¹⁷ In 2022, only 28 Division I athletic programs generated more revenues than expenses. More than 320 programs required student fees or institutional help to cover the gap between revenues and expenses. In 2022, schools generated $8.4 million in median revenue, with $30.3 million in median athletic expenses. The compensation of coaches accounted for roughly 20% of total expenses. In 2024, Kirby Smart, the head football coach of the University of Georgia, received a salary of more than $13 million. The 12 highest–paid coaches all received at least $9 million each.¹⁸ For the last few years, the composition of expenses has remained relatively consistent at roughly 20% for coaches, 17% for administration, 17% for facilities, 28% for a variety of other expenses, and 18% going to cover student aid.

Looking at these big–picture numbers, college sports look to be a financial negative for most schools. The compensation paid to the athletes out of the pool should be an expense for that particular sport, further increasing the loss. However, these broad numbers do not tell the whole story. College athletics consist of many sports programs, some more popular than others. Perhaps some are included to satisfy Title IX nondiscrimination provisions. The Service may flag for UBTI just one particular sport or perhaps even just the broadcasting deals. If that is the case, lawyers and accountants would almost certainly get involved. UBTI is not a gross receipts tax but is a tax on the net UBTI after deducting those expenses that are directly related to the revenue in question. In addition to this being an accounting burden, with many expenses shared among various programs, this may put some of those less–popular athletics at risk if schools are burdened with greater accounting and tax expenses, along with the new student–athlete pool payroll distributions.

Planning considerations

Small Division I programs may have the most flexibility moving forward. They could embrace the new pool compensation rules, thereby eliminating or greatly reducing their reliance on the NIL collectives, which do not provide tax–deductible contribution opportunities for donors. UBTI classification may be of little concern since many programs probably do lose money, even before the pool payouts begin. Alternatively, if compensating athletes does trigger UBTI concerns, without the same pressure as the larger schools, the smaller schools can opt out of pool compensation altogether. They can continue to rely on traditional scholarship awards and supplemental third–party NIL payments to support their programs.

Larger, highly competitive Division I programs now have two ways to support their student–athletes, beyond traditional scholarship support. To remain competitive, the larger programs can compensate their players directly within the pool payroll allowance and supplement these awards with the already substantial balances held by the NIL collectives. Even if the NIL collectives continue to provide much–needed support, this does open the opportunity for schools to seek more direct, tax–deductible contributions to the universities to fund the pool payroll requirements. Regardless of UBTI concerns, the power schools will need to raise the capital to compensate their players and address all accounting and tax requirements that result.

Since the implementation of NIL payments, the taxation of college sports has been anything but certain. The NCAA, the collectives, and university advisers have clearly expressed that NIL payments from the collectives are in no way for performance. All parties have walked a very fine line working very hard to avoid a “pay–for–play” determination. Until the settlement, they seemingly managed to keep the amateur status of student–athletes intact.

Then suddenly, it’s OK to pay student–athletes. At this stage, we do not know what this means for the taxation of sports programs, in general and specifically for UBTI.¹⁹ Rather than having the courts slowly work through the issues generated by NIL and pool payments, Congress could provide legislative clarification. Specifically, Congress could again amend the statutory definition of exempt activities to either include or exclude college athletics in this funding environment. With clarification, less time and money may be spent on resolving the yet unanswered questions. Statutory clarification would provide some consistency, i.e., lessen the risk of different judges reaching different conclusions and help practitioners guide both universities and donors through planning and compliance responsibilities. Until then, practitioners must continue to keep abreast of developments and understand which issues remain uncertain.

Footnotes

¹ Crowley, “Name, Image, Liability,” Journal of Accountancy (March 30, 2023).

²“NCAA Adopts Interim Name, Image and Likeness Policy,” NCAA (June 30, 2021).

³Coello, “What Is NIL in College Sports? How Do Athlete Deals Work?,” ESPN (March 24, 2025).

⁴Chief Counsel Advice AM 2023-004.

⁵House v. NCAA, No. 4:20-cv-03919 (N.D. Cal. 6/15/20) (complaint filed).

⁶Carter v. NCAA, No. 3:23-cv-06325-RS (N.D. Cal. 12/7/23) (complaint filed).

⁷In re College Athlete NIL Litigation, No. 4:20-cv-03919-CW (N.D. Cal. 7/26/24) (plaintiff’s motion for preliminary settlement approval).

⁸As of the writing of this article, it may be more appropriate to consider it the Power Four + 1, i.e., without the collapsing Pac-12.

⁹Title IX of the Education Amendments of 1972, P.L. 92-318, banning discrimination on the basis of sex.

¹⁰Crawford, “College Football’s Top 50 Programs Ranked by NIL Efforts,” 247 Sports (Aug. 27, 2024).

¹¹Talty, “Who’s Got the Money? Tiering the Eight Remaining College Football Playoff Teams by NIL Spending Power,” CBS Sports (Dec. 30, 2024).

¹²Crawford, “College Football NIL Collective Leaders for 2025: NCAA Estimates Nation’s Top-25 Spenders,” 247 Sports (Dec. 12, 2024).

¹³Secs. 512(a)(1) and 513(a); see American College of Physicians, 475 U.S. 834 (1986).

¹⁴Regs. Sec. 1.513-1(a).

¹⁵Tax Reform Act of 1976, P.L. 94-455, §1313(a), effective Oct. 5, 1976.

¹⁶Backus, “Big Ten Remains Power Five Revenue Leader With $880 Million Haul for 2023 Fiscal Year, per Report,” CBS Sports (May 23, 2024).

¹⁷“Finances of Intercollegiate Athletics: Division I Dashboard,” NCAA (December 2023).

¹⁸Cunningham, “12 Highest Paid College Football Coaches for the 2024 Season,” SI Online (Nov. 19, 2024).

<p¹⁹>Other issues remaining to be resolved include whether paid college athletes will be classified as employees of the university.

Contributor

Amy J. N. Yurko, J.D., Ph.D., is an associate professor at Duquesne University in Pittsburgh. For more information about this article, contact thetaxadviser@aicpa.org.