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.
As 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 Businesses
A 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 Liability
Finding 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 Skills
By 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.