The question if student athletes become employees will be with regards to whether what they’re doing has become more entertainment-based than educational. If so, the IRS could determine that athletic departments should not be tax-exempt organizations (if they hold their own exemption), or that the athletic department’s revenue should be subject to Unrelated Business Income Tax. That tax could range from 15-35 percent at the federal level and would vary at the state level.
Maybe you’re thinking athletic departments shouldn’t be tax-exempt anyway, so what’s the big deal? The big deal is that most athletic departments generate more money from donations than from all those millions in television money you hear about in the news. For example, in fiscal year 2012, University of Florida’s athletic department reported contributions of $46 million. Its conference distribution, which included revenue from the conference’s television contract and payouts from bowl games and March Madness, totaled $22 million.
What if those donations weren’t tax deductible? Sure, maybe you’d still make the required donation for your seat at the football or basketball game, but would big-money donors who generally kick start capital campaigns still make those donations? University of Central Florida’s athletic department recently received the largest gift in its history: $4 million from the Wayne Densch Charitable Trust for a new leadership center for student athletes. As a charitable trust, the gift would not have been made to a for-profit entity. Not to mention, gifts over $14,000 would be subject to the gift tax. So, not only would big-money donors no longer get a tax deduction, but now they’d be paying for the right to donate to the athletic department.