Will getting an EIN put us on the IRS radar?

Usually the first contact a homeschool organization has with the IRS is getting an Employer Identification Number (EIN). Most banks now request an EIN when a group opens a checking account. One group in Virginia is doing things right by getting a checking account for their homeschool co-op instead of using a personal account, but they wonder if this will mean more contact with the IRS.

Hi Carol,

I am new to an existing homeschool co-op in VA. Tomorrow morning we are meeting to discuss our options as it relates to becoming a more formal organization. I want to be able to advise them as to their options on this.

This co-op is more then 12-15 years old, we do not accept donations or need to, so far we have been handling the money through someone’s personal bank account, we receive fees from students and then pay teachers and reimburse them for materials, generally we break even each year (or can if we need to), there are regular Board meetings, I do not know if they have bylaws or take minutes but I do know they have a mission statement. The bottom line is that we want to be able to have a business checking account.

Can we get an EIN in order to open a checking account in our co-op name without incorporating and without having a state or federal annual filing requirement? I seem to remember that once you get an EIN (that I think is required for a business bank account), you are on the radar screen with the IRS and will need to file some sort of return.

Thanks so much

Nancy in VA

Nancy,

Yes, you can get an EIN for banking purposes, but not have any other dealings with your state or the IRS. Many homeschool groups operate for years with no contact from their state or the IRS.
You will deal with the IRS if you become a 501(c)(3) tax exempt organization or pay workers.

BTW, I will caution you that if you are paying teachers, then you do have some reporting to the IRS and your state government. You will have to pay payroll tax (Social Security and Medicare) and file a W-2 if they are employees or file a 1099MISC if they are independent contractors. You should read this blog entry: Paying co-op teachers is a sticky issue

Best of success to you!

Carol Topp, CPA

Can my family’s homeschool be a nonprofit?

Homeschool CPA was recently asked,

I see several articles (on your website www.HomeschoolCPA.com) on setting up as a not-for-profit for homeschool organizations (e.g. homeschool co-ops), but I wonder if I could set my own family’s homeschool up as a non-profit. We’re in Texas, so we are considered a private school.
-Lauren in TX

Lauren,
You asked a good question and I’ve been asked it before in different ways. Nonprofit organizations have a lot of benefits including tax free income, discounts, and sometimes pay no sales tax!

I’m not a lawyer, nor familiar with Texas private school laws, but I’ll try to explain how I see things.

Briefly, a nonprofit organization exists to serve a group, not an individual. The IRS will not grant “recognized charity”, 501(c)(3) tax exempt status to a group that is formed solely to benefit the founder’s family. A tax exempt organization must serve a public good.

The IRS forbids private “inurement” in 501(c)(3) tax exempt organizations. Inurement means to be beneficial or advantageous. Inurement occurs when an organization is formed or operates with an incorrect charitable purpose that allows individuals in control to profit from the organization. 501(c)(3) organizations can lose their tax exempt status for practicing inurement.

Inurement/Private Benefit – Charitable Organizations

A section 501(c)(3) organization must not be organized or operated for the benefit of private interests, such as the creator or the creator’s family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization.
>From the IRS website at http://www.irs.gov/charities/charitable/article/0,,id=123297,00.html

So, in short the answer is “No”, even if your state classifies a homeschool as a private school. That’s how I see it.

Carol

Now, here are my “lawyer words…”
Any tax advice contained in this communication was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

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

Any Tax Breaks for Homeschoolers?

Since tax season 2012 has officially launched, I’ll address a question I am frequently asked,

Do homeschoolers get any tax breaks for their homeschooling expenses? Can a homeschool family deduct any of their homeschool expenses?

The simple answer is “No; there are no tax credits for homeschool expenses from the federal government.”

The longer answer is “Maybe, depending on what state you live in.”

Several states have an educational tax credit. Iowa, Arizona, Minnesota and Illinois all have some sort of  tax break for individuals. The credit is available to any public or private school student, so it is not unique to homeschoolers. Florida and Pennsylvania offer businesses tax credits if they sponsor a scholarship.

This document has a chart of education tax credits and deductions by state (updated November 2008). Scroll to page 6 to see the chart.

http://www.house.leg.state.mn.us/hrd/pubs/feelaw.pdf

Home School Legal Defense Association has an explanation of some states’ tax breaks or credits:

http://www.hslda.org/docs/nche/000010/200504150.asp

Homeschoolers can get creative and think perhaps they can start a business or a nonprofit organization of their homeschool activities and then deduct their expenses.  Ann Zeise of A to Z Home’s Cool addresses these ideas:

http://homeschooling.gomilpitas.com/articles/031401.htm

You cannot contribute to your own child’s K12 education and get any tax deduction for it, no more than if you sent him to a private school and tried to write off the tuition.

Carol Topp, CPA

“Digital image content © 1997-2007 Hemera Technologies Inc., a wholly owned subsidiary of Jupiter Images Corporation. All Rights Reserved”.

Is my homeschool a nonprofit?

Every year our county sends out a form to every homeschooler that asks this question, “Have you filed Articles of Incorporation with the office of the Kentucky Secretary of State as a non-profit corporation drafter under KRS 273 or received a letter from the IRS granting you 501c3 status as a non-profit corporation? (Homeschools, by their nature, are considered non-profit.)”

I am confused as to how a homeschool is by nature non-profit and it seems to imply that if we are we should have filed for that status.

Can you point me in the right direction to answer this question?

Kindly,
Gina in KY

From what I understand, KY considers homeschools as private schools.

Brick and mortar private schools are 501c3 nonprofit charities, but individual homeschool families cannot qualify for 501c3 nonprofit status with the IRS. Only groups qualify for 501c3 status with the IRS. A homeschool group may qualify for 501c3 status, but an individual family cannot be a 501c3 nonprofit, even though in KY they are private schools.

It is a bit confusing because of the inconsistent way that the IRS and KY define private schools.

This blog post should be helpful:
http://homeschoolcpa.com/can-my-familys-homeschool-be-a-nonprofit/

I hope that helps.

Carol Topp, CPA

Congratulations: Another homeschool group receives 501c3 status

Congratulations to Eclectic Teaching Consortium (ETC) of Arkansas on receiving 501(c)(3) tax exempt status form the IRS!

The IRS received approved their application in only 32 days!  That’s fast for the IRS!

I was happy to help this group become tax exempt and continue serving homeschoolers in AR!

 

Carol Topp, CPA

 

Do you know the pros and cons of 501c3 status?

Do you know what 501c3 status could mean for your homeschool group?

My book The IRS and Your Homeschool Organization could help your group as well.

A 120 page book explaining the pros and cons of tax exempt 501c3 status. Is it needed? Is it worth it?

 

Table of Contents
Sample pages

Price: $9.95

Ebook version $3.99 (pdf format)

Kindle version $3.99

Smashwords version $3.99 (multiple e-reader formats for Kindle, Nook, Sony, etc)

Don’t throw away tax exempt status

Don’t throw away your tax-exempt status!

From the IRS:

If you are a tax-exempt organization that normally has annual gross receipts of $50,000 or less  you must file the e-Postcard.
The e-Postcard is due by the 15th day of the fifth month after the close of your tax year. So if your organization operates on a calendar year, the e-Postcard is due by May 15 of the following year.

What happens if you don’t file? You risk losing your tax-exempt status!

If you think this new filing requirement may apply to your organization, go to
IRS.gov/eo for complete details.

 

Here’s a nice flyer the IRS made up to explain the e-postcard:
http://www.irs.gov/pub/irs-tege/p4619p2.pdf

Don’t lose your tax exempt status by ignoring the e-postcard.  It’s too valuable to lose!

Carol Topp, CPA

Do not call a fee discount a scholarship

Tricia from TX is helping her homeschool co-op apply for 501c3 tax exempt status with the IRS.

On the application form (Form 1023), the IRS asks about scholarships and Tricia asks:

 We do provide scholarships for our members that cannot pay their $30 membership fee.  Should we check “yes” for line 22?

Part VIII, Line 22 is for “real” scholarships like the kind a high school graduate is given to go to college.

What your group offers is a fee discount. I find that co-ops frequently call these fee discounts “scholarships.” That is the wrong word to use.

Do not call a fee discount a scholarship.

I recommend that you change your wording in your co-op and especially change the word on your application to the IRS.

I think you should check the box NO. You do not provide scholarships as the IRS is using the word.

Carol Topp, CPA

Can homeschoolers take the $250 educator tax credit?

Educator Tax Deduction for Homeschoolers?

The IRS gives a $250 tax deduction to educators for unreimbursed supplies they spend in the classroom.

 

Can homeschoolers take this deduction?

The IRS guidelines say to be an eligible educator:

“You work at least 900 hours a school year in a school that provides elementary or secondary education, as determined under state law.”

To work means to get paid for your work as a teacher-employee. Homeschool parents are not employees of a school. We do not get paid; we do not get a W-2. The IRS will check for a W-2 from a school if a taxpayer takes the Educator Expense deduction. Homeschoolers would not have a W-2 from a school, even if your state classifies your homeschool as a private school.

The Educator Expense Deduction was initiated by President Geo W. Bush. It expired with all the other Bush tax cuts,on December 31, 2011. It will not be available for 2012 unless renewed by Congress.

I do not recommend that homeschool parents take the Educators Expense deduction. Sorry.

Carol Topp, CPA

P.S. Here are my required “lawyer” words:
Internal Revenue Service Circular 230 Disclosure: Advice relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing or recommending to another party any transaction or matter addressed herein.

Update on IRS Cyber Assist

Here’s the latest on the Cyber Assistant from author and former IRS examiner Sandy Deja:

The National Taxpayer Advocate’s 12/31/2011 Report to Congress is critical of IRS delays in releasing the Cyber Assistant and recommends that Congress require the IRS to move forward on making it available. (You can view this report at http://www.irs.gov/advocate/article/0,,id=252216,00.htmlis.)

In response, the IRS said, “Software testing revealed problems requiring correction prior to public launch, and the IRS had to delay the release. Because the IRS must balance a number of competing information technology needs, we cannot presently predict when Cyber Assistant will be available.”

So it looks as if the Cyber Assistant is on the back burner for now.

Sandy Deja
501c3book.com
Author of Prepare Your Own 501(c)(3) Application

 

Background: Cyber Assist was (is?) the IRS’s program to allow nonprofits to apply for tax exempt status online. The IRS was proposing to lower the application fee from $400 or $850 to only $200 for organizations applying online using Cyber Assist.

 

Thank you Sandy for the update, even if it’s not what we want to hear…

Homeschool leaders, Sandy has a terrific website http://501c3book.org/ and ebook Prepare Your Own 501(c)(3) Application to help you apply for 501c3 tax exempt status. Don’t go down that road alone!

 

Carol Topp, CPA

 

 

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