Charitable giving, or the expectation of charitable giving – whether it is the giving of time or money – seems to go hand in hand with being a professional athlete. These days, it seems that if an athlete does not have a charitable organization or private foundation in his/her own name, it is likely that she/he spends time volunteering at a local children’s hospital, for example, as a result of being on a professional sports team. But why do individual athletes maintain charity organizations? Certainly it cannot simply be that athletes sign their names onto golf tournaments and athletic skills camps as a result of a directive issued by a sports agent or other career manager.
Keyword: 501(c)(3) Tax-Exempt Charity
Maximizing the Benefits of Running a Nonprofit Organization While Minimizing Risks Is Crucial to the Athlete’s SuccessAs most would agree, although there are exceptions, people are not generally altruistic or philanthropic by nature. The most basic economic theories advise that people act in their own best self-interest in an attempt to maximize their financial standing. Well, in an effort to inject philanthropic motives into society – thereby decreasing self-interest – many governments have devised plans that effectively incentivize high-income earners to work for, create and/or manage nonprofit organizations.Nonprofit Organizations Are Public Service BusinessesA nonprofit organization (NPO), or charity, is essentially a business set up to perform work that benefits certain underprivileged classes of people. Historically, charities were developed to meet certain needs of society and were formed to do public good – to provide aid to segments of the community that tend to fall outside of the general scope of public assistance. In the U.S., NPOs are set up and qualified by the Internal Revenue Service (IRS). In turn, the IRS gives the charity various tax benefits, including complete tax exemption, or 501(c)(3) status. Obtaining 501(c)(3) status let's all who do business with the charity know that their donations and services may also be entitled to reap the benefits of tax exemption. As a result, people who are more likely to work for and/or with a business that not only helps a segment of society in need, but in so doing, garners tax benefits.A Legal Way to Decrease Tax LiabilityFinding oneself in a higher income bracket means learning about increased tax liability. In an effort to decrease the sting, some athletes are able to drop down into lower tax brackets by investing in charities as a method of legally decreasing tax liability. Lucky for some, U.S. federal and state tax laws have been enacted to encourage the making of charitable gifts and to facilitate the operation of charitable organizations. These laws reflect the public policy favoring charitable giving and recognize that many charities relieve the public tax rolls from the burden of financing human and community services.A donor (corporate or individual) can claim a personal federal income tax deduction for contributions made to a 501(c)(3) tax-exempt charity. In some parts of the U.S., corporations can make deductible charitable contributions of up to 10% of their annual taxable income. In other jurisdictions, individuals can deduct up to 50% of their adjusted gross income in any year for contributions made to 501(c)(3) public charities and to some types of 501(c)(3) private foundations. However, donations to most types of private foundations are limited to 30% of an individual’s adjusted gross income in each year. (To be sure, consult your trusted, licensed tax and/or financial professional for all matters dealing with tax liability.)Given the availability of a charitable donation tax deduction that presumably lessens tax liability, the question remains: Why is it that so many athletes seem to be running their own charitable organizations?Develop Real-World Business SkillsBy developing a charitable organization, athletes give themselves the opportunity to develop business acumen and experience by managing an organization from the ground up. Athlete/employers will have direct oversight over the business, which will enable the athlete to make immediate changes should the need arise within the charity.Ultimately, running the charity ensures that the athlete obtains hands-on experience by making decisions that will have an immediate impact on the organization’s bottom line, learning the importance and role of each staff member, determining who should/should not have leadership and control in the business, and assessing the financial viability of the company. Such real-world business lessons will prove invaluable experience to the athlete, who will one day transition into the business sector of society when professional sports provide no further opportunities.In addition, for those athletes who find themselves providing financial support to family members and friends, funding a NPO may give these recipients a way to earn the money to which they have become accustomed.Beware of the Legal PitfallsWhile the benefits of nonprofit organization ownership are numerous, they can be outweighed by the significant legal pitfalls into which many fall. In the U.S., NPOs are generally governed by the office of the attorney general for the state of incorporation. The attorney general requires strict compliance with all of the charities’ activities, including programming such as raffles, tournaments, contests, gala events, etc.Compliance with the office of the attorney general requires registering an upcoming event and reporting gross receipts, as well as many other requirements. Not only must NPOs register and report to the attorney general well in advance of an anticipated event, but, in many jurisdictions, NPOs must register and report to local and municipal government agencies as well. Failure to comply may result in violation of state and federal civil and penal laws, potentially subjecting the NPO, its officers and/or directors to liability.Yet another legal restriction is that the assets of a public benefit corporation must be irrevocably dedicated to charitable purposes, and cannot ever be distributed for private gain. This means that if the charity’s organizers later decide the venture is too daunting and that they do not wish to operate the corporation as a charity, they may terminate the business, but they cannot take back its assets – computers, desks, paper, and anything else acquired for the charity. Legally, those assets belong to charity, and must be transferred to another charity that has the same or similar purpose(s).If You Plan to Run It, Be Efficient – Have Measurable Returns and Fulfill Your MissionA charity’s success can be calculated by evaluating its efficiency. One way to do this is to compare the costs of fundraising vs. actual dollar value given in support of the mission statement.Consider a celebrity golf tournament. Unless most of the services are donated, initial costs for this event will be quite high as the costs include: the rental value for use of the golf course, maintenance at the golf course, wait-staff, catering, bar, day-of event planner, décor, marketing, invitations, etc.Many organizations will use this type of an event as the only annual fundraising tool. If planned and executed well, the high fundraising costs can be balanced by even higher prices for the cost of admission, an associated auction and other draws that will get people in the door and opening their wallets. After all, it is not just a matter of covering the costs associated with this annual event. The charity not only needs money to pay for the event, but it also needs money to cover the operational costs it takes to keep the charity operating throughout the year. Fundraising costs, in-kind donations, and officer and director salaries are necessary components of running an efficient charity and will have a direct impact on whether the charity is actually able to provide the services in support of its mission to, for example, provide coats, books, shoes or school supplies to children from a certain area of the world; keep kids off of the streets by introducing them to new sports; and/or educating the public about the importance of adopting, spaying and/or neutering dogs and cats.If all of these costs are not properly managed, the charity may find itself in the uncomfortable position of having nothing to give away, or just a small percentage of the revenue generated for the year. Proper management leading to operational efficiency should yield the exact opposite result. In such situations, optimal outcomes will yield a giving of a majority percentage of annual revenue.Before starting a charity, be sure to carefully consider personal and professional goals, skills sets of those who will provide assistance, and anticipated time commitments as it is imperative that the charity be efficient.Perhaps most important is that that the organization is properly run. Athletes should protect themselves by consulting knowledgeable, skilled and licensed individuals who will help them achieve their altruistic goals.This article is published as an information service and does not constitute the rendering of tax, financial, legal advice or other professional service. Kanika Corley is an attorney with Sedgwick LLP, where she specializes in all matters related to media, entertainment and sports law, including intellectual property and nonprofit compliance.
Published 10-24-2011 © 2022 Access Athletes, LLCKeywords: 501(c)(3) Status, 501(c)(3) Tax-Exempt Charity, Annual Taxable Income, Attorney Kanika Corley, Charitable Donation Tax Deduction, Charitable Giving, Decreasing Tax Liability, Developing Real-World Business Skills, Donations, Entertainment Law, Federal Law, How to Start Your Own Nonprofit, IRS, Legal Pitfalls, Nonprofit Organizations, NPO, Office Of Attorney General, professional athletes, Sedgwick LLP, Sports Law, State Laws, Tax Exemption