Can a homeschool group give discounts to a family in need?

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Carol,
Our homeschool group is a 501c3 organization. A parent member of our group recently approached me and asked if we could start a scholarship program. (This would not be a college scholarship program.) The parent’s hope is that a parent (or any individual) could give a donation to the organization to be used for scholarships for families who were facing financial hardship to attend our classes.
The scholarship would only be used to reduce a needy family’s tuition at our co-op. The parent that asked this question was hoping to get a tax deduction for his gift. I know that there could potentially be an issue with private inurement* for the families receiving a “scholarship” in this situation.
I would greatly appreciate your input. I am happy to schedule a phone consult with you.
Thanks!
Sharon in PA
Sharon,
What your member is proposing is a type of benevolent fund.
I don’t like the use of the word “scholarship” because, to the IRS, “scholarship” means payments on behalf of a student to a college.
I wrote a blog post about it: http://homeschoolcpa.com/do-not-call-a-fee-discount-a-scholarship/
Granting a tuition discount to a needy family is not inurement* if you put into practice a few safeguards such as:

  • the board, or a committee decides on the criteria to grant a tuition discount for a hardship (consider creating a policy)
  • the family receiving the benevolent discount has no vote or decision in granting the discount
  • the donation is not “ear marked” for a specific family. The board gets to decide who gets a benevolent discount, not the donor.

*Inurement is when the earnings of the organization are used for the advantage of a specific individual instead of the purpose of the organization. Inurement is forbidden for 501(c)(3) organizations.

I hope that helps,

Carol Topp, CPA

How the IRS sees homeschool co-ops (podcast)

IRS and homeschool groups

In this episode of the Dollars and Sense Show podcast, host Carol Topp continues her topic “Who’s Afraid of the IRS?” and discusses how the IRS sees homeschool co-ops and 501(c)(3) tax exempt status.

Listen to the podcast

Listen to the first part of this presentation where Carol discussed homeschool support groups and IRS 501(c)(7) tax exempt status as a Social Club.

Get a copy of the handout.

Carol also mentioned the article “Do You Know About IRS Required Filings for Homeschool Organizations?” Get it here.

The IRS and Your Homeschool Organization

Carol’s book, The IRS and Your Homeschool Organization, is available here.

 

Homeschool group answers IRS questions

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Many homeschool organizations are finding that the new IRS Form 1023-EZ makes applying for 501(c)(3) tax status quite easy (compared to the full  26-page Form 1023!)

But, unfortunately, one homeschool group, Crossroads Co-op from Maryland, found their application held up because the IRS wanted more information. Specifically, the IRS asked for:

  1. An original copy of their organizing document. Fortunately Crossroads had Articles of Association complete with the IRS required language all ready to go!
  2. A detailed description of their activities including who, where, when, fees, and time and resources
  3. Actual revenues and expenses for 3 years.

I helped Crossroads write a reply to the IRS and in only 5 days, their 501(c)(3) status was granted!

We don’t think that the IRS was targeting Crossroads Co-op or homeschool groups; we think Crossroads was just randomly selected by the IRS to provide details.

The important lesson learned is that nonprofit organizations need to have their financial information and organizing documents ready to send into the IRS when asked.

Applying for 501(c)(3) tax exempt status is more than just filling out the Form 1023-EZ online. It involves properly structuring your nonprofit.

Crossroads had done that, so they were able to answer all the IRS questions and get their tax exempt determination letter in a timely manner.

If you need help applying for tax exempt status for your nonprofit organization, contact me.

 

Carol Topp, CPA

 

How can the IRS revoke my tax exempt status when I never applied for it?

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Carol,
About 15 years ago a couple of moms started a homeschool summer sports group. About 8 years ago, two leaders opened a bank account. The bank set them up with a “Club” account and secured a federal ID number (EIN) for the club. We never applied to the IRS for anything. We never filed any annual reports (the Form 990-N).

Now from reading your website and our emails, it sounds like our tax exempt status was revoked and we need to get it back.

How can something we never had (501c7 Social Club status) be revoked? 

Your help in clarifying this is appreciated, so we know how to move forward.

Lisa

 

Lisa,

I know this is confusing.

Your sports group is a recreational club that fits the IRS definition of 501(c)(7) social club.

501(c)(7) Social Clubs can “self declare” their tax exempt status without officially applying. Technically, you “self-declared” your tax exempt status when you said you “never applied to the IRS for anything.”

Since 2007, the IRS has required all tax exempt organizations, even those that self-declared their tax exempt status, to file the annual Form 990N.  Read more here: http://homeschoolcpa.com/irs-form-990n-faq/

Your organization failed to file the 990-N for three years the and IRS has revoked your “self declared” tax exempt status.

Now you need to file the paperwork (Form 1024) to get back your tax exempt status that you didn’t need to apply for in the first place!

Crazy? YES!
Frustrating? YES!

A lot of small organizations have learned that their tax exempt status had been revoked and they didn’t even know about it!

I don’t think the IRS thought this through. I wish they had not revoked the status of 501(c)(7)s, but they did. I also wish they would allow a simple phone call to get reinstated instead of filing the paperwork and paying the IRS $400 fee.

Here’s the IRS webpage explaining how to get your tax exempt status reinstated. They offer 4 methods.

How to Have Your Tax Exempt Status Reinstated

If you find reading the IRS webpage a bit confusing, feel free to contact me and we can set up a personal consultation by phone to discuss your options.

Carol Topp, CPA

 

Meet Carol Topp, the HomeschoolCPA, in Michigan

INCH postcard

I’m headed to Michigan to speak at the INCH homeschool conference in Lansing May 15-16, 2015.

I’ll be speaking on several topics including

  • micro business for teens
  • career exploration
  • starting a homeschool co-op
  • raising adults
  • record keeping in high school
  • teaching kids about managing money

Can’t make it to any of these conventions? Listen to my podcast, The Dollars and Sense Show.

Recent podcasts include:

  • We’re Not Raising Children, We’re Raising Grown Ups
  • Warnings Against Frugal Homeschooling
  • Has Your Homeschool Group Lost Its Tax Exempt Status

Who’s Afraid of the IRS? (podcast)

IRS and homeschool

 

Are you afraid of the IRS? Should you be?

How does the IRS see homeschool organizations?

In the latest episode of the Dollars and Sense podcast, host Carol Topp discusses how the IRS sees homeschool organizations. Carol discusses homeschool support groups and IRS 501(c)(7) tax exempt status as a Social Club.

Listen to the podcast here

Get a copy of the handout Who’s Afraid of the IRS Handout

Carol mentioned the article “Do You Know About IRS Required Filings for Homeschool Organizations?” Get it here.

The IRS and Your Homeschool Organization

Carol’s book, The IRS and Your Homeschool Organization, is available here.

Carol Topp at CHAP in Harrisburg, PA

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I love talking to homeschoolers at conventions, so I was happy to be invited to the Christian Home Educators of Pennsylvania conference in Harrisburg, PA May 8-9, 2015.

(that photo is from when I was in Harrisburg a few years ago)

It’ll be talking about:

  • Career Exploration for high school students
  • 30+ Micro Business Ideas for Teens (and parents!)
  • Top(p) Ten Tips for Running a Homeschool Organization

I’ll also be part of an After High School panel

And as part of the Teen Track, I’ll be showing my video Starting a Micro Business and discussing the video with teenagers in a two-session block. I’ve never done that before, so it should be a lot of fun!

 

If you’re not near Tulsa, maybe we can meet up at these conventions:

 

Can’t make it to any of these conventions? Listen to many of these topics on my podcast, The Dollars and Sense Show.

Recent podcasts include:

  • We’re Not Raising Children, We’re Raising Grown Ups
  • Warnings Against Frugal Homeschooling
  • Has Your Homeschool Group Lost Its Tax Exempt Status

How to change your nonprofit’s fiscal year

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Carol,

I help run a homeschool co-op that has 501(c)(3) status.

The IRS has our fiscal year end as December 31 because that’s what our original officers put on our SS-4 application to get our employer ID number.  But we’d like to change it to a school year with our year end being June 30.

How can we change our fiscal year?

Tracy in Michigan

 

Tracy,

Changing your fiscal year is pretty easy.

Large nonprofits

If your homeschool organization is large enough that you file a Form 990 or 990-EZ (more than $50,000 in annual gross revenues), then you file a Form 990/990-EZ for the short period resulting from the change.

In Tracy’s case, the short period would be from January 1 until June 30.

Write “Change of Accounting Period” at the top of this short-period return.

 Small nonprofit organizations

But chances are your homeschool organization is small and files the annual information epostcard, Form 990-N. There is no way to write “Change Accounting Period” on the electronic Form 990-N.

In that case you can file the longer Form 990-EZ or file a Form 1128, Application to Adopt, Change, or Retain a Tax Year, to change its accounting period. Form 1128 instructions explain how to complete and submit the form.

User Fee

The Form 1128 may involve a $250 user fee. Ouch!

But, a user fee is not required if requesting an automatic approval (under any of the sections of Part II of the Form 1128). This probably applies to Tracy’s organization because it has not changed its fiscal year in the past 10 years.

Write a letter

Or the IRS says you can write a letter requesting a change in accounting period. Send the letter to:

Internal Revenue Service
1973 N. Rulon White Blvd.
Ogden, Utah 84404

 

Sources: http://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Annual-Reporting-Requirements-Filing-Procedures:-Change-in-Accounting-Period
http://www.irs.gov/instructions/i990/ch01.html#d0e814

I hope that helps,

 

Carol Topp, CPA

Meet Carol Topp, the HomeschoolCPA in OK, PA, MI, TX (or your home!)

HearCarolSpeakOCHEC2015

Homeschool convention season has arrived!

I met many of you last week at the Midwest Homeschool Convention in Cincinnati and next week (April 23-25) I’ll be in Tulsa, OK at the Oklahoma Christian Home Educators conference. It’s the first time that I’ve been to Oklahoma, so I get to check another state off of my list!

I’ll be speaking on several topics including micro business for teens, career exploration, leading a homeschool co-op and becoming an author.

If you’re not near Tulsa, maybe we can meet up at these conventions:

 

Can’t make it to any of these conventions? Listen to my podcast, The Dollars and Sense Show.

Recent podcasts include:

  • We’re Not Raising Children, We’re Raising Grown Ups
  • Warnings Against Frugal Homeschooling
  • Has Your Homeschool Group Lost Its Tax Exempt Status

Carol Topp

Are discounts to board members taxable compensation?

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My homeschool group gives a fee waiver of our dues to our board officers. Would that discount be reported to our officers as taxable compensation?

Melissa

 

Melissa,

This is an excellent question because I’ve encouraged homeschool groups to offer discounts on membership fees to their volunteers or board members as a way to show appreciation.

But as my blog post, Is this a gift or compensation to a homeschool leader?, points out, compensation to board members is taxable income.

So I did a little research. Unfortunately, I didn’t find a clear answer.

I found advice like this (my emphasis added in bold):

“It is not illegal for a nonprofit to compensate its board members with reasonable fees unless prohibited by the organization’s bylaws. If compensation is authorized, it is advised that compensation amounts be set by independent directors or an independent compensation committee with input from outside advisors. It needs to be clear that compensation does not imply monetary profit. It is very important that board compensation be comparable to that of other nonprofit organizations and not deemed excessive by the IRS.”

from Center for Association Leadership

and this

When a board member has a conflict of interest—in other words, when a board member might receive some personal benefit as a result of a pending decision—he or she is required to explain the circumstances and avoid taking any part in the decision (stepping back in this way is often called “recusal”). IRS rules impose penalties on people (directors and others who work with nonprofits) who receive undue benefits — the rules governing this subject deal with “Intermediate Sanctions.”

from Idealist.org

and like this

Certain types of educational, religious and other tax-exempt, nonprofit organizations need to be careful that their leaders do not receive “excess benefits.” This can occur when a person who is defined by law as an “insider” receives unwarranted compensation.

An excess benefit is any kind of transaction in which an insider receives an economic benefit from an exempt organization that exceeds the fair market value of what the organization receives in return.

The (IRS) regulations list certain types of economic benefits that will be disregarded when considering whether an insider has received an excess benefit, including most nontaxable fringe benefits and expense reimbursement.

from Sibson Consulting

These sources tend to focus on excessive, unreasonable, unwarranted compensation and “undue” benefits to nonprofit board members. But most homeschool organizations are not excessive in the discounts they offer to board members or other volunteers.

So here’s my advice:

  • Keep your fee waivers to board members “reasonable.” Do not offer discounts that exceed the fair market value of the services the board members provide.
  • Have the amount of fee waivers decided by a separate, independent committee or put it to the vote of the full membership. The board should not vote themselves a fee waiver.
  • Add a provision to your bylaws allowing a fee waiver (or tuition discount) to board members or other volunteers. Consider granting a percentage discount instead of a dollar amount.

and finally,

IRS Pub 15-B states that “An educational organization can exclude the value of a qualified tuition reduction it provides to an employee from the employee’s wages”

Meaning qualified tuition discounts are a nontaxable fringe benefit.

By definition, an officer of a nonprofit is an employee, so reduced tuition (and I’d include fee waivers) is a nontaxable fringe benefit to your board officers.

 

Carol Topp, CPA