Here's how taxes, liability and ROI factor into NIL deals for cars

Let’s say you’re Jane or John Doe, an everyday American. If you want to lease a vehicle, you’ll likely agree to a lease structure based on an agreed-upon number of miles per year. The greater the number of miles, the greater the cost of the lease. Your lease term might be 24 or 36 months.

Now, let’s say you’re not the average American. You’re extraordinarily gifted at football.

We’ll choose a random name for you, something like C.J. Doe. You’re 6-foot-3, you’re the former No. 3 quarterback prospect in the country and you threw for 44 touchdowns and 100 times as many yards last season for a college football blue blood.

In that case, your arrangement for the use of a temporary vehicle might look pretty different than that of the other drivers on I-70, especially in the NIL era of college athletics.

Of course, our hypothetical C.J. Doe is Ohio State quarterback C.J. Stroud.

Stroud is the new wheelman of a Mercedes-Benz G-Class, also known as a G-Wagon, which he’ll drive for 45 days. After that, he’ll pick out a new ride for August and the first half of September.

After 45 days of driving that car? Well, he’ll rinse and repeat.

On3 spoke with executives involved in recent NIL deals involving vehicles, as well as a tax expert, to better understand how the deals were arranged, their terms, the return on investment and what athletes could owe in taxes.

How NIL deals might be structured differently than typical lease

“A normal person that comes in… they’re putting a certain amount down and then they can structure, you know, 7,500 miles a year, 12,000 miles a year, 15,000 miles a year,” said Ryan Burton, the general manager and managing partner of Sarchione Auto Gallery, the Canton, Ohio-based used, luxury car dealership group that provided Stroud with the G-Wagon. “The more miles, of course, the more money. His is different in the fact that it’s a NIL deal, so there are no mileage stipulations that were put on the G-Wagon.”

The idea of providing Stroud with a different car every 45 days came from where Stroud hopes to go — the NFL.

“I just kind of shot from the hip on that,” Burton said, “because doing deals with a bunch of NFL guys, I realized that they get bored pretty easy.”

Burton described the deal as “a mutual agreement between both parties, our attorneys and his agent, and essentially, the deal’s structured with receivables and it’s nothing more than that.”

Stroud will receive the use of the gallery’s vehicles in exchange for attending a few events at the dealership and posting about the gallery on social media. On June 18, Stroud posted a five-picture carousel of the G-Wagon on his Instagram account, which has more than 122,000 followers.

McGovern Automotive Group, which has dealerships in Greater Boston, New England and Long Island, recently agreed to deals with Boston College quarterback Phil Jurkovec (an Audi S7) and wide receiver Zay Flowers (BMW X6M). “Social media equity” is how Chris Benvie, the director of marketing at McGovern Automotive Group, describes the effect of the deals, saying, “We’ve seen our social media channels explode.”

“They’ll be in these cars throughout the rest of their time at Boston College,” he said. “There’s no 24-month, 36-month lease. These cars aren’t leased, anyway. They’re purchased vehicles because they’re both preowned vehicles. It’s really difficult right now to get new cars … We went with later-model, good cars that made sense, that were safe, that weren’t too flashy, but that these guys would be comfortable in.”

The vehicles have low lifetime mileage and McGovern Automotive Group will service them and provide car washes when needed. As far as the players’ responsibilities from the agreement, Benvie said, “I would say that side is a little loose. We didn’t really feel like we wanted to force them into doing anything specific.

“When they picked up their vehicles, there was an announcement on their social media and a press release. When they do photos or when they’re driving around their vehicles, they will tag our dealerships that they got their vehicles from. They’re going to come to a couple of our special events that we do for the community. Whether it be a walk-run that we do, whether it be a charity event that we do at one of our luxury car dealerships. They’re going to come. They’re going to say hello.

“Again, we’re not really trying to force them into doing anything. And we tried to keep it relatively loose. However, we still want people to know that they are McGovern athletes.”

The liability: ‘It’s ultimately on him. However, we have a policy that we ride with him’

Even if it’s unlikely and even if it’s not a fun topic of conversation, liability plays an important role in any NIL deal that involves the use of a vehicle.

When asked about the liability for Jurkovec and Flowers, Benvie was straightforward.

“In the state of Massachusetts, you have to obtain your own insurance on a vehicle so they have their own insurance on their vehicles and the liability is theirs in that respect,” he said.

After meeting Stroud, a noted car enthusiast, Burton said he felt good about agreeing to a deal with the quarterback.

“There’s some players or deals that you don’t feel warm and fuzzy about,” Burton said. “But his, I felt good. I felt like the car was going to be taken care of. There was not going to be any issues. All those elements came into play.”

“It’s ultimately on him,” Burton said of the liability. “However, we have a policy that we ride with him for anything above and beyond that if something were to happen, essentially our policy would kick in to offset anything that his policy wouldn’t.”

“Typically, a wheel scratch would be something out of pocket, whereas a fender bender would be his insurance. He’d be responsible for the deductible, that type of stuff. It would be anything that was a major accident that was actually the player’s fault would be on their insurance and then our insurance would kick in if something wasn’t covered.”

NIL deal with multiple vehicles likely a win-win on multiple levels

There are multiple benefits for both Sarchione Auto Gallery and Stroud in their change-cars-every-45-days arrangement. First, the gallery will avoid a scenario where Stroud racks up too many miles on one vehicle, such as the G-Wagon.

“With these high-end cars, the mileage is huge,” Burton said.

Providing a car for only 45 days inherently limits the car’s mileage, plus “his driving habits that we were made aware of, we’re not too worried about that,” Burton said.

Second, twice every three months, the gallery will receive what’s called earned media, when news outlets share pictures of and stories about Stroud’s latest car. Burton estimated he participated in 15 to 18 interviews within 48 hours of the announcement of Stroud’s deal.

“The amount of press we got from this… has been crazy,” he said.

Maybe the interest and interview requests will gradually decline by the time Stroud picks out his third car. But every month and a half, Sarchione Auto Gallery will appear in the news. For the gallery, it’s almost like having multiple marketing campaigns combined within one NIL deal. That’s a win for the corporate partner.

On Stroud’s end, he’ll drive multiple luxury vehicles before the anticipated payday that comes from being selected in the NFL draft. If you think you might want to buy a six-figure car someday, it can’t hurt to make sure it’s one you actually enjoy driving, right?

In the meantime, he’ll have the chance to live what most of his classmates can only experience in a video game: swapping out one luxury vehicle for another with relative ease.

By having NIL deals with two of the most prominent Boston College football players, McGovern Automotive Group has the opportunity to strengthen its position in the market and within the university community.

“We were already one of, if not the largest sponsor of Boston College athletics,” Benvie said.

Dealerships on ROI: ‘Once they feel comfortable… it’s crazy how fast the word spreads’

When asked about how McGovern Automotive Group tracks the return on investment on its NIL deals, Benvie cited Autotrader as a hypothetical point of comparison for tracking sales. He said, “with these guys, it’s not as straightforward from an ROI perspective.”

He said there have been a handful of customers who have purchased cars as a result.

But this is also where earned media and social media equity come into play. Benvie said McGovern Automotive Group’s social media followers have increased, more people are sharing its posts online and the group can gain insights from that data.

“You can track all that demographically, right, from an age group as well as an area standpoint,” he said. “The buzz in the Boston area around Newton and from that age group, from that type of customer, if you will, seems to be growing for us.”

In addition to Burton doing between one and two dozen interviews in the first two days after Stroud’s NIL deal, he said agents representing athletes in college, the NFL and NBA have reached out to try to arrange deals.

“It’s super different than a normal store,” Burton said. “You know, we’re one on one. I text these guys. They call me. So I’m kind of building a brand on the athlete’s side of things. We do a ton of business across the country. All over, you know. Mainly Florida, Texas, and out West but these players, once they feel comfortable with a person or a dealership, it’s crazy how fast the word spreads, and then their family and their friends are calling you because they need, you know, a regular $25,000 car.”

How much players might owe in taxes for luxury car NIL deal

Like many tax-related questions, there’s not a one-size-fits-all answer when it comes to how much college athletes will owe in taxes after signing a NIL deal for the use of a luxury vehicle.

It depends on their state of residence and it depends on the state where they attend school, and if those are two different states.

It depends on the value of the car.

It depends on how many months they drive the car.

It depends on their total NIL earnings.

It depends on what business expenses they can write off, if any.

It depends on a lot of things.

Athletes’ NIL income could be subject to state and federal income taxes, and federal self-employment tax (15.3 percent of any income over $400).

The Internal Revenue Service produces an annual lease value table, which says vehicles with a fair market value of more than $59,999 have an annual lease value equal to 25% of the fair market value, plus $500. The annual lease value includes the value of maintenance and insurance, but not gas.

Katie Davis is a CPA and partner at James Moore & Co., a Gainesville, Florida-based firm that offers tax consulting, 401K auditing and HR services. As a hypothetical, Davis applied the IRS’ annual lease value table to estimate for On3 the total tax due for someone who’s a California resident, who attends school and earns non-resident income sourced in Ohio, who drives for the entire calendar year a car valued at $200,000 whose services aren’t sourced to another state, who hasn’t earned any other taxable income, and who has no deductions.

This is an extremely specific hypothetical scenario where an individual’s only taxable compensation is the use of a luxury vehicle. The total tax due would be roughly $13,000, Davis said, after doing some back-of-the-napkin math.

Then add on the average annual cost of car insurance, which is $545 for minimum coverage and $1,771 for full coverage, according to Bankrate.

Greg Geisler, a clinical professor and the associate chairperson of the accounting department at Indiana University’s Kelley School of Business, wondered whether the value of a vehicle from an NIL deal would be based on the IRS’ annual lease value table or simply the fair market value of a lease.

This is where education and resources, provided either by universities or third-party providers, are critical to helping athletes answer these questions as they navigate their NIL deals.

‘If your only main [NIL] deal is a car, you need to have some cash elsewhere’

Davis said the right thing for a dealership to do accounting-wise is to debit the advertising expense and credit the inventory. This would then trigger a Form 1099. A Form 1099-NEC is needed when someone earns at least $600 in non-employee compensation. It would be in the dealership’s best interest to issue one. It could then deduct the expense as advertising.

Forty-nine percent of athletes who responded to an NCAA survey last year said they need more educational resources on taxes and financial literacy. Non-employee, non-cash compensation is an area where education is particularly important.

“I’m not saying don’t make a million dollars because you have to pay taxes on it. I’m not even saying don’t drive a car because you have to pay taxes on it,” Davis said. “I’m all for paying taxes on NIL income. I’m more concerned that they don’t know that they have to pay taxes, especially if [a] car dealer isn’t giving them a 1099. That’s what concerns me, and they don’t know or they get caught by surprise when a 1099 shows up.

“Let’s say this athlete wasn’t thrown a bunch of cash from a collective. If your only main deal is a car, you need to have some cash elsewhere to be able to pay the taxes on the car.”

‘The ultimate goal is to make sure that he has a Heisman-type season’

Of course, only an exclusive class of college athletes can warrant a NIL deal for a luxury car. But not every athlete would necessarily want one, either.

“I mean, there’s nothing wrong with that. I just know, personally, I get around campus on a scooter,” UCLA quarterback Chase Griffin told On3 in a tongue-in-cheek comment at the NIL Summit.

What if, Griffin posed, “they gave you that amount that they’re paying on the lease per month and they gave that just to you outright for the four years you were there. That’s serious money that you could have been investing.”

A NIL deal for the use of a vehicle might lead to a high four-figure or low five-figure tax bill, depending on the value of the vehicle and the term of the agreement. On the other hand, it’s also pretty sweet to drive a G-Wagon at 20 years old.

“It’s a win-win for both,” Burton said. “The ultimate goal is to make sure that he has a Heisman-type season and gets to the league and keeps endorsing our brand with our relationship that we’re building now.”