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

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.

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

In particular, many homeschool groups wonder if they should file for LLC status as part of becoming a 501(c)(3) tax exempt organization.

Caution:  I am not an attorney, nor am I offering legal advice.  I will relay what I have leaned about LLC’s filing for 501c3 tax exemption from the IRS, but I am not offering a legal opinion. I recommend that you seek legal counsel if you pursue either option.

Only recently has the IRS granted 501c3 tax exempt status to LLCs. LLCs are a relatively new business structure (only available in all 50 states in the mid 1980′s) and the IRS is slow to accept changes. In a document titled “Limited Liability Companies as Exempt Organizations-Update” (2001 Exempt Organization CPE Text. Available at http://www.irs.gov/pub/irs-tege/eotopicb01.pdf ) the IRS outlined 12 conditions that an LLC must satisfy to qualify for exemption under IRC (Internal Revenue Code) 501c3.

These conditions are legally complex and I would strongly recommend that you seek experienced legal counsel before organizing a nonprofit LLC.

I read an article titled “Nonprofit LLCs: Time for a New Experiment” (http://www.mayer-riser.com/Articles/nonprofit/npllc.htm) and the author, a nonprofit attorney, advises:

Until state legislatures address the unresolved issues, the actual use of the LLC form by nonprofit organizations should be undertaken only after careful review of current law in the applicable jurisdictions, and only with the assistance of qualified counsel with experience in drafting complex and detailed operating agreements and experience in the law of tax-exempt organizations.

Unfortunately, at the time of the article in 2002, only 11 organizations had obtained 501c3 status as LLCs, so experienced assistance may be difficult to find.

The reason that most businesses use the LLC structure is for limited liability. I organized my own sole proprietorship accounting practice as an LLC  because I wanted limited liability and protection of my personal assets. For a nonprofit organization, such as most homeschool groups, nonprofit corporation status in your state brings similar protections of limited liability. If your main reason for seeking LLC structure is for limited liability, nonprofit incorporation in your state is the easier option.

Carol Topp, CPA

I am not an attorney, nor am I offering legal advice. I recommend that you seek legal counsel if you have additional questions or pursue Limited Liability Company status.

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

photo credit: stevendepolo

Carol’s book has been so helpful in getting our co-op organized. We have determined we are going to file Articles with our state and create by-laws and set ourselves up for a non profit corporation. With our fundraising and dues, we never bring in more than  $5,000. We probably have around 50-60 families returning this year. We are 100% volunteer based for our fundraising (silent auctions, garage sale.)
Come tax time, do we file with the IRS (like I do for our household every year?) For example, do we use turbo tax and file for our co-op? And if we have let’s say, $1,000 left at the end of the year, is that taxable? We do not want to zero out our account as it is nice to have a cushion for various reasons.

Lisa

Lisa,

Good questions!

Q: Come tax time, do we  file with the IRS (like I do for our household every year?) For example, do we  use turbo tax and file for our co-op?

A: Nope. This is a nonprofit organization, not part of your family/individual income, and not a for-profit business, either. Don’t use TurboTax. Please! (we tax preparers are not crazy about TT in general)

Technically, you would file a corporate tax return (Form 1120), but I would not recommend doing that.

Since your group qualifies as an automatic 501(c)(3) tax exempt organization (under $5,000 gross annual income), you could file a Form 990N. It’s an online form of only 5 questions. You may have to call and register with the IRS first, since you are not in their database. But many small nonprofits do not file the Form 990N at all.

(If you make more than $5,000 gross annual income, you must apply for tax exempt status and then will file the Form 990N or the Form 990EZ or the full 990 depending on the gross income of your organization. If your nonprofit has gross income of $50,000 or less, you file the Form 990N. That covers 99% of all homeschool organizations.  So the paperwork is quite small and easy to deal with.)

The IRS expects nonprofit corporations to file for tax exempt status with in 27 months of formation (the date of your nonprofit incorporation status from your state). So you have about 2 years to run your program before you have to file for tax exempt status. In the meantime, you can file Form 990N each year.

Q: And if we have let’s say, $1,000 left at the end of the year, is that taxable?
A: Taxable, unless you qualify for tax exempt status (either automatically or by application).
Q:We do not want to zero out our account as it is nice to have a cushion for various reasons.
A: Yes, that the reason why groups want tax exempt status. To reserve their surplus for future use. It’s a wonderful blessing in the USA that our gov’t allows charitable, religious and educational organizations to exist tax free. Not every country allows that!

Hope that helps!

Carol Topp, CPA

P.S. I’m glad my books were helpful. I have just updated my book on  501(c)(3) tax exempt status for homeschool groups. It’s called  The IRS and Your Homeschool Organization and covers all this information in greater detail. Read about it here.

Hi Carol,
Thanks so much for all your help in getting our Christian Homeschool Network up and running.  Things are going well so far. My husband brought a card he saw at the post office and handed it to me thinking it might apply to our group. The same basic info is on this web site: http://www.irs.gov/charities/article/0,,id=169250,00.html

It is about a new filing requirement for small tax exempt organizations.Does this apply to us? I was unsure if this was just for 501 C 3 organizations.
Thanks, Carol
Sharon W

Sharon,
The new IRS ePostcard (Form 990N) notification is for 501(c)(3) organizations. The IRS is trying to clean up its database by using this short electronic postcard. They hope to find any “dead” nonprofits that are no longer in operation. They are also looking for small nonprofits that have “grown up” to the $25,000 (now $50,000) gross revenues per year and should be filing a 990EZ or 990 Form annually.  The ePostcard is a way for small nonprofits to acknowledge that they are still under the $25,000 (nor $50,000) annual revenue threshold for filing the 990.

I recommend that you consider 501(c)(3) status ASAP.  The IRS expects nonprofits to file for 501(c)(3) tax exempt status with in 27 months of formation (incorporation as a nonprofit).  Your nonprofit incorporation date was May 27, 2008, so you have until August 2010 to apply.  Otherwise, the IRS requests an explanation of why tax exempt status was not filed earlier and tax exemption is granted to the date of filing, not back to the date of formation.  This could mean that a nonprofit might owe back income tax for the period that they were not tax exempt.

If your gross revenues stay under $5,000 a year, you are granted an exception from filing the paperwork for 501c3 status. If gross revenues get to be over $5,000 a year, your group should file for 501(c)(3) tax exempt status or pay corporate income tax on any surplus (i.e. profit).

In a nutshell, a small nonprofit has three choices:
1. Stay under $5,000 gross revenues per year
2. File for 501(c)(3) tax exempt status
3. Pay corporate income tax on any annual surplus.

I hope that helps,

Carol Topp, CPA

Update as of August 2010:

The IRS is now asking all nonprofit organizations to begin filing the Form 990N , even if they have not yet applied for tax exempt status. Here is what the IRS states on their website http://www.irs.gov/charities/article/0,,id=156389,00.html

Tax Law Compliance Before Exempt Status Is Recognized

An organization that claims tax-exempt status under section 501(a), but has not yet received an IRS letter recognizing exempt status, is generally required to file an annual exempt organization return.

The annual return is either Form 990, 990EZ or the new electronic postcard Form 990N.

The difficulty in filing the Form 990N if you have not yet received 501(c)(3) tax exempt status is that your organization is not in the IRS system. You’ll have to call the IRS and get entered into their system before you can file your 990N online.

Any wonder why many small nonprofits are not filing the 990N prior to being officially tax exempt?

Carol Topp, CPA

Hi Carol,

I just read this and was concerned that I would need to file something during the 27 months time frame.  Please explain if possible.
http://www.irs.gov/charities/article/0,,id=156389,00.html

Teri

Teri,

The link to the IRS website concerns IRS requirements before you apply for tax exempt status. The link above states this (in part)

Tax Law Compliance Before Exempt Status Is Recognized

An organization that claims tax-exempt status under section 501(a), but has not yet received an IRS letter recognizing exempt status, is generally required to file an annual exempt organization return.

This is a fairly new requirement from the IRS. I used to tell nonprofit organizations that if they had not yet applied for 501c3 status, they did not have to file the Form 990. It came to my attention only a week ago that the IRS wants Form 990 from all nonprofits.

Fortunately, the form your organization (and all small nonprofits with annual gross revenues of less than $50,000) would need to file is the 990N, an electronic postcard that asks about 5 questions: Name and address of organization, the principle officer’s name and check a box that your annual gross revenues are under $25,000. It is very short and would take less than 5 minutes once a year.

Here’s a blog post that answers your question. http://homeschoolcpa.com/does-new-irs-990n-apply/

I hope that helps.

Carol Topp, CPA

My webinar is this Thursday, Oct 27, 2011 at 8 pm ET

This handout of the Slides will be very helpful as you listen in to the webinar: