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”.

Opening a checking account shouldn’t be this expensive!

Hi Carol,
We are a homeschooling group for ages 9-14, designed for the purposes of socialization, support, educational and career guided opportunities as well as promoting volunteerism throughout our community.

I’m trying to open a checking account for us. I contacted the IRS and have an EIN number now. Now, the bank wants me to file a fictitious name (have to publish in Legal Notices section of newspaper for $25 minimum, and fill out a request for fictitious name through our state that costs $50. They are considering it a sole proprietorship.

Just double checking to see if this is the best way to go, as it will cost $75 minimum plus the costs of checks (about $20).

Thanks for your time,

Karen

 

Karen,

What you described is a nonprofit organization, not a sole proprietorship.

When you obtained an EIN from the IRS did you check the box saying “Nonprofit”?
Hopefully, you used the name of your group on the EIN application as well.
If so, tell that to the bank (and show the IRS confirmation letter of your EIN) and you should not need a name registration.

If not, then you need to recontact the IRS. Close down the EIN they gave you and get one in the name of your group as a nonprofit organization (probably a 501c7 social club).

Read my article here on nonprofit social clubs:
http://homeschoolcpa.com/wp-content/uploads/2009/09/HomeschoolGroupsAs-SocialClubs.pdf

I hope that helps.

 

Carol Topp, CPA

HomeschoolCPA.com

 

Lower price on Money Management ebook

Start 2012 off right for your homeschool group!

Get your homeschool group’s finances organized!

I have lowered the price for Money Management for Homeschool organizations from $10.00 to $3.99.

This 39 page ebook covers money management for small, medium and large sized groups. Sample forms and examples of financial statements in clear English are provided. Also covered are topics such as using Quickbooks, collecting fees, creating a budget, insurance, and hiring paid teachers. All written specifically for homeschool groups.

Click here to read a sample and to purchase

Happy New Year 2012!

Carol Topp, CPA

What tax forms do I file for a homeschool co-op?

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.

An alternative to a full audit

A homeschool leader in North Carolina recently wrote to me looking for help with doing an audit:

We offer boys and girls soccer, basketball, baseball, softball, volleyball, and cheerleading. In January we received our 501c3 status as a non-profit group. It is time for our annual audit, but I am not sure which way to go now and who to get to do the audit.

This group had bylaws that required their financial statements to be audited by qualified individuals.

For small nonprofits (revenues less than $25,000 per year), audits are rarely needed and are frequently too expensive and time consuming. Most nonprofit audits cost at least $3,000. Instead of an audit, I recommended changes to their bylaws and some practices and policies to help them be fiscally responsible, but not over burdened.

Some of my suggestions were:

• Separation of duties
• Monthly bank reconciliation
• Regular financial reporting to the board
• Create and monitor a budget

These practices do not replace the role of an full audit, but they help provide accountability.

Finally, I recommended they consider performing an internal audit occasionally. An internal audit can be preformed by volunteers from your organization. Here are a few websites that offer more information.

The following website explains internal audits for small churches and nonprofits:

http://www.freechurchaccounting.com/churchaudit.html

It also contains a checklist for conducting an internal audit

http://www.freechurchaccounting.com/support-files/internalauditchecklistguidelines.pdf

Does your group have good financial policies and practices? You can start with my article, Best Financial Practices for Homeschool Groups. It is available when you sign up for my newsletter here.

Also my ebook Money Management for Homeschool Organizations has advice and tips for properly handling the finances in your homeschool group. Ebook price $10
Read more here.

Here’s to keeping your homeschool group strong!

Carol Topp, CPA

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

Audits: should your group be doing them?

Hi Carol,

I am looking on your HomeschoolCPA web site for a list of services that you provide.  Our homeschool group is wondering if you offered a service for auditing our books each year to make sure everything is in order?

Debi K

Debi,
Here’s the link to my services: http://homeschoolcpa.com/services/

I can offer to look over your record keeping system and offer recommendations, but I cannot (and will not) do a full audit.

The word audit has  a specific meaning in accounting and it involves an in-depth look at your entire accounting operation. It is very time consuming and expensive ($3,000 and up). I don’t do audits because they require  a staff of people to perform and require a review of my accounting practice by other CPAs, which would cost me at least $1,000.

Instead,  I can offer my consulting services and discuss your records and system of handling your money and make recommendations. That would help your organization quite a bit, but not be a full audit. I’ve done that type of work for homeschool groups before.

Carol Topp, CPA

HomeschoolCPA ebooks mentioned by HSLDA

I am pleased to announce that Homeschool Legal Defense Association (HSLDA) has mentioned several of my ebooks and articles on their Group Services webpage.

While homeschool groups are not HSLDA members, HSLDA does offer their group services staff, with more than twenty years experience in local and/or state support group leadership, to assist groups by providing examples of how other leaders have handled similar circumstances.

http://www.hslda.org/GroupServices/Leaders.aspx/Legal

On the Leader Support tab you’ll see Legal and Finaincial Resources and my ebooks are articles are metioned there including:

Money Management for Homeschool Organizations by Carol Topp, CPA. (e-book)

“How Do We Become a Recognized Nonprofit?” by Carol Topp, CPA

“Do We Need to Incorporate?” by Carol Topp, CPA

Q&A for Homeschool Leaders (e-book) by Carol Topp, CPA—The most frequently asked questions from homeschool leaders on the IRS, nonprofit and tax exempt status, boards, conflict, money, fund raising, volunteers, paying workers and insurance.

Thanks HSLDA in helping to assist homeschool leaders!

Carol Topp, CPA

More nonprofits can file the easy Form 990N

Many homeschool organizations that have tax exempt status are small enough they do not have to file any tax forms with the IRS. And now new IRS guidelines mean even more groups are free from IRS filing requirements!

Small exempt organizations can file the simple Form 990-N, the electronic postcard, instead of the longer Form 990-EZ or  Form 990.

The e-Postcard is an electronic notice filed at http://epostcard.form990.org.

Need help determining your gross receipts? Send me an email and we can arrange a private consultation over the phone. Email me here.

If your tax exempt homeschool organization needs help filing their Form 990EZ or Form 990, I can help. Read more here.

Would your homeschool group benefit from being tax exempt? Find out by reading my articles on the pros and cons of tax exempt status.

Homeschooling as a home-based business

Dear Carol,

I am a homeschooling mother of three. I recently named our homeschool and incorporated the name to offer tutoring and testing for income (in my home). What do I need to do to report the income to the IRS. Should the name be a LLC. or S-Corporation? If you can shed some light on how I need to handle this, I would greatly appreciate it. I need the income to continue homeschooling, and this is unfamiliar territory for me. Thank you in advance for help.

Connie

Connie,
Thank you for contacting me. I wish you the best of success in your new endeavor as a business owner! It can be exciting and overwhelming at the same time.

You said you incorporated the name.  What specifically did you do?  Did you merely register the name or did you file incorporation papers with your state?  There is a big difference with respect to taxes.

Most tutors start out as sole proprietors and never progress to S Corp (or the larger C Corp) status.  There is no need to be a corporation for most tutors. This blog post I wrote might be helpful: Why You Should Be a Sole Proprietor

You might benefit by reading my articles and ebook, Small Business Start Up Guide, available at http://caroltoppcpa.com/services/small-business/

Sole proprietors file a Schedule C as part of there individual Form 1040.  A Schedule C shows all the income and expenses of the business.
Corporations have different IRS forms that are much more complex and usually require a CPA to prepare.

I hope that helps. There is a lot to learn!

Carol Topp, CPA

Next Page »