Can a homeschool be tax exempt and obtain grants?

Dear Carol:
I am interested in writing proposals for grants for my family’s home school. As an individual home school, not as a home school support group, I want to apply to receive small amounts of money for travel, museum entry, art gallery entry, books, posters, etc. More often than not, I find this statement :

“All applicant organizations or sponsoring agencies must be exempt from federal taxation under the Internal Revenue Code Section 501, in order to be eligible for funding.”

What do I have to do to have our home school be exempt from federal taxation?

Thanks.

Nancy H., Mississippi

Nancy,

You asked an excellent question. You are correct that many fund raising organizations now require 501c3 tax exempt status. Some homeschool groups want to become 501c3 tax exempt organization just so that they can participate in some fund raisers. I have a homeschool co-op as a client right now applying for 501c3 status.

A private individual or family cannot be a 501c3 tax exempt organization. The reason is that the IRS does not allow tax exempt organizations to offer private benefits or what they call “inurement” (meaning to become beneficial or advantageous) to individuals. Tax exempt organizations must benefit a group, preferably the general public.

I have been asked your question before so I wrote about it on my blog. Here’s the link: Can my family’s homeschool be a nonprofit?

You might also read my blog entry on doing a family fund raiser: Can my individual homeschool have a fundraiser?

I hope that helps!

Carol Topp, CPA

An alternative to individual fundraising accounts

Hi Carol,
Fund raising is really on my heart right now. Most of our group operational expenses are covered by membership fees and activity fees, right now.  Probably the biggest need is for families who can’t afford class tuition or activity fees.

We want to be able to reduce the expenses overall, but also help these homeschooling families who are on very tight budgets.  I would like to have fund raisers during the year that families can participate in and know that if they work very hard the funds they raise can be applied to their own fees.

My sister used fund raisers through her high school band program to raise money for her own trip to an out-of-state band conference.  Some parents just wrote a check and their kids didn’t have to work the fund raiser, while others (like my sister) needed the help and worked hard for it.  How can this idea apply to our fund raisers?

Our treasurer is concerned about crossing the line and breaking the rules about fund raising with the IRS.  We don’t want to do that.  I just don’t want money to be a barrier for some great kids.

Angela

HomeschoolCPA’s most important blog posts

There are my most important blog posts.

I refer homeschool leaders to these blog posts most frequently.

These are keepers!

Print them put and share them with your homeschool leader.

Is your homeschool co-op’s hired teacher really an employee?

We’re not 501c3 and don’t want to be!

Do not use individual fund raising accounts

Are Homeschool Support Groups Automatically Tax Exempt?

What business structure and tax forms are needed for a new homeschool co-op?

Carol Topp, CPA

Can we accept donations from Paypal and Google checkout

photo credit: iliveisl

From my understanding, you can’t use Google checkout for donations unless we are a 501(c)(3)
http://checkout.google.com/support/sell/bin/answer.py?hl=en&answer=72721
http://www.google.com/support/forum/p/checkout-merchants/thread?tid=00a314399fff1200&hl=en

I do think you can use PayPal for donations, even if we aren’t a 501(c)(3). It’s taxable but considered a gift. Do I understand this correctly?

You are correct  that only donations to a 501(c)(3) organizations are tax exempt.

I read the links you provided and Google only allows 501(c)(3) and 501(c)(6) (Business leagues with a 501c3 charitable fund) organizations to accept donations.

Paypal is much  less restrictive (but the IRS determines which donations are tax deductible, not Paypal!)

If your organization’s website accepts donations and is not a 501c3, then the income is fully taxable.

FWIW, here’s a chart explaining the various 501c types and when tax deductible donations are allowed by the IRS: http://www.guidestar.org/help/501c_orgs.jsp

How can your homeschool group become a 501(c)(3) tax exempt organization? Start by reading these articles:

501c3 tax exempt status

• When to become a 501c3?
• Do we need 501c3 status?
• Are you ready for 501c3 Application?
• A checklist for organizations desiring 501c3 status

Carol Topp, CPA
HomeschoolCPA.com

What is Unrelated Business Income Tax?

Sometimes a homeschool group brings in a lot of money from fund raising. These efforts are so successful you may wonder if your group owes anything to the government in taxes. For the most part, fund raising is not considered part of your group’s mission; it is just a means to the end. After all, your group’s mission is to encourage homeschooling, not to sell ads, pizza or other products.

The Internal Revenue Service calls the money you raise “Unrelated Business Income,” meaning it is money collected in a trade or business that is not related to your primary mission. The IRS assess a tax on unrelated business income called the Unrelated Business Income Tax or UBIT. The purpose of this tax is to prevent nonprofit, tax-exempt organizations from having an unfair advantage over the for-profit marketplace.

The best example of unrelated business income is a gift shop in a nonprofit hospital. The income from a gift shop is not related to the hospital’s primary purpose of giving medical treatment, so the profits from the gift shop are taxed.

Your homeschool organization could have unrelated business income if you sell T-shirts, candy bars, entertainment books, candles, pizza coupons and a host of other products or if you make money from ads or Amazon commissions on your website.

Fortunately the IRS has several exceptions to paying the UBIT tax:

• A $1,000 threshold allows that the first $1,000 in profit from an unrelated business will not be taxed.

• If the fundraiser (or unrelated business) is run by volunteer efforts (i.e., no paid staff) then the proceeds are not taxed.

• If the fundraiser is not regularly carried on, such as a once-a-year spaghetti supper, then the proceeds are not subject to UBIT.

• If you are selling donated items, like in a garage sale, the income raised is not taxed.

One of these exceptions are bound to apply to most homeschool organizations.

The rules regarding UBIT are complex. You can read more about UBIT in IRS Publication 598 Tax on Unrelated Business Income of Exempt Organizations (http://www.irs.gov/pub/irs-pdf/p598.pdf).

Carol Topp, CPA

Box Tops for Homeschoolers

From the Homeschool Legal Advantage website

Box Tops for Homeschoolers….The Fair Thing to Do

The Christian Law Association’s Homeschool Legal Advantage program was contacted by a home school support group.

A major corporation was assisting schools to raise funds by collecting box tops that could be redeemed for cash.  The support group was initially informed that home schools could participate, but when they tried to redeem the items they had collected, they were told that in order to participate, a school  needed to be accredited.

After a number of phone calls from CLA’s attorneys, the corporation changed its rules.  They did the right thing. Homeschools are able to participate, just like everyone else.

That’s really what we fight for when we serve a homeschool family. We just want fairness.  We are not asking to be above the law or to have our own rules; but in terms of home school families they should be treated like everybody else.

Homeschooling for the foreseeable future – it’s going to continue to be a legal hot button, but the Christian Law Association is ready to serve your home school or Christian school at a moment’s notice.

Thanks to Homeschool Legal Advantage and their efforts to help homeschool groups!

My homeschool co-op has been using Box Tops as a fund raiser for quite awhile. I’m glad things were straightened out so that homeschool groups can continue to raise funds in this way!

Carol Topp, CPA

Do not use individual fund raising accounts

From Parent Booster USA comes this warning about fund raising accounts:

Do not use individual fundraising accounts (IFAs) without a legal review. The IRS has strict rules on any activity that benefits the individual members of a group. The IRS generally finds IFAs to violate its rules. IFAs are activities in which parents/students engage in cooperative fundraising activities, providing “credit” to the individual “accounts” of those who participate in the fundraising activity(ies). Only in very limited circumstances are IFAs considered legal fundraising activities of booster clubs. Parent Booster USA can provide assistance in obtaining a legal review of an organization’s IFA policy. See also Individual Fundraising Accounts.

I agree with Parent Booster USA, the IRS does not allow nonprofits to establish individual fund raising accounts, where an individual or family get a part of the fund raising proceeds for their personal use.

To learn more about fund raisers for your homeschool group, read my article “Easy Fund Raisers for Homeschool Groups” here

and my blog posts on fund raising here.

Carol Topp, CPA

Are fund raisers harming your chances for tax exempt status?

Many homeschool organizations depend on fund raisers to help run their homeschool co-ops and support groups. These fund raisers could actually harm a group’s chances of obtaining tax exempt status.

True Story:

Julie is treasurer of a homeschool co-op in OK that desires to file for 501c3 tax exempt status with the IRS. I examined her financial statements and saw that the group depended heavily on profit from fund raisers including candy, food and flower sales. These fund raisers required Julie to collect over $12,00o a year in sales. The co-op made a profit of nearly $4,000 every year from their fund raisers.

“It’s a blessing to the co-op, because many of our families cannot afford even the small co-op fees we charge. And friends and neighbors beg us to keep selling our products, especially the locally made food.”

The profit from the fundraisers was actually more than the amount collected in co-op dues.

Unfortunately, with most of the co-op’s income coming from fundraisers and not co-op fees, the IRS may not grant Julie’s co-op 501c3 tax exempt status.

The IRS requires a significant portion of your income come from public support (i.e., the dues from your co-op families) and not from an “unrelated businesses” (i.e. selling products in a fund raiser). The IRS defines “significant” as having more than 1/3 of your income come from public support.

Fortunately for Julie’s group, the IRS has several exceptions. One of them worked for Julie’s group. Her fund raising efforts were all done by volunteers and so the IRS considers that fund raiser as part of the group’s support and they meet the 1/3 test mentioned above.

The IRS rules and exceptions get a bit complicated and both the homeschool leader, Julie, and I did our research. We will be very careful and thorough when explaining the fund raising programs to the IRS when Julie’s co-op files for tax exempt status with the IRS.

If your group has concerns about their fund raising practices, these related blog posts might help:

The IRS’s Word on Fundraising Do’s and Don’ts

The IRS and Fund Raising

What does the IRS mean by not allowing “private benefit” in a fund raiser?

Also, my ebook, Question and Answers for Homeschool Leaders addresses fundraisers in detail.

Read more including a sample chapter here

Order a copy (in pdf format) for immediate dowload for $8.00 here.

…working to keep you on  the right side with the IRS!

_____________________________________

Finally, attend my free webinar on Fund Raising in a Homeschool Group on Tuesday, November 30 at 8:00 pm EST, 7:00 pm CT. You can listen in on-line and participate in the chat room or phone in and attend the webinar that way. For details on the login in information, phone number to call and workshop handout, click here.

Feel free to tell other homeschool leaders in your area about my webinar. The more, the merrier!

There is no charge for the webinar, except long distance phone charges if you call in .

Carol Topp, CPA

Webinar: Fund Raisers for Homeschool Groups

Fund Raisers for Homeschool Groups webinar

We discussed:

• Ideas: Easy fund raisers for your homeschool group
• Pitfalls to avoid
• The IRS and Fund Raising: Avoiding stuff that can get you in trouble!

How to listen if you missed the live session:

http://www.talkshoe.com/tc/73712

Grab This Handout

This handout references some links and important information about fund raising pitfalls to avoid.

Fund Raising Webinar Handout

Carol Topp, CPA

New article: Easy Fund Raisers for Homeschool Groups

I have just uploaded an article I wrote for The Old Schoolhouse magazine  titled

Easy Fund Raisers for Homeschool Groups

The articles covers several ideas for easy fund raisers including:

• Food as a fund raiser
• Coupons and reward programs
• Donation drives
• Income from your website

Other issues are addressed as well such as whether the income from a fund rasier is taxed and whether a family can hold a fundraiser for their individual homeschool.

Here’s an excerpt:

Many homeschool groups bring in needed income through fundraisers. Through experience I have found that some fundraisers are much easier to conduct than others. Although very common, selling products door to door is one of the hardest ways to raise money because managing the orders, delivering the product, and storing inventory is a lot of hard work. My homeschool group had tried selling products in the past, but we wanted an easier way to bring in funds. We found several ideas that have worked well for homeschool groups including reward and coupon programs, fund raising dinners, donation drives and website income.

Read the entire article on my Leader Tools/Articles page (scroll down to the bottom)

Carol Topp, CPA

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