I am curious how a scholarship for a family works in terms of tax liability in an all volunteer co-op with no payment to teachers, board members, etc. Each family pays a membership fee which covers expenses for family events, insurance, state filing fees, etc.
For example, family A donates the amount of a family membership to the organization. The board notices that Family B is out of work and therefore credits the amount paid by Family A to Family B’s registration fees. Family B still pays things like class fees, but the annual registration was not paid by Family B.
What duty does the co-op have in terms of tax liability for itself and are there any potential pitfalls to be aware of?
Your organization does not have to give the recipient of a benevolent gift any documentation. Some homeschool organization call this gift a tuition discount or a “scholarship.” Read here why I don’t like the word scholarship when you are really giving a needy family a tuition discount.
The donor can be given a receipt for their donation. Taxpayers must have a receipt if the donation is more than $250, so frequently charitable organizations give every donor a receipt (an email is OK). Be sure to include the statement that “No goods or services were received in exchange for this contribution.”
The IRS requires 501c3 organizations filing a Form 990 with a total of more than $5,000/year in grants or assistance to individuals to keep a record of the amounts and purpose of the grants. These records are submitted to the IRS on Form 990 Schedule I. These records are not reported to the IRS if your organization files a 990-EZ or 990-N. In other words, only large charities (more than $200,000 in annual revenues) report information on the grants to individuals. The names of the individuals are not given to the IRS, just the amount and purpose of the assistance.
IRS Publication 4221PC has guidelines to follow regarding charitable gifts and record keeping.
It’s kind of a dry publication, but very important. The IRS used to mail Pub 4221 with your letter approving 501c3 status, but stopped doing that several years ago to save printing costs. It’s such an important publication that I recommend treasurers read it regularly, maybe once a year. Find it online here: https://www.irs.gov/pub/irs-pdf/p4221pc.pdf
Hope that helps,
Carol Topp, CPA