Can we start running our homeschool co-op before we apply for tax exempt status?

I am working with three friends to start a homeschool co-op this fall. I purchased your book and read over your website. I can see we may need your services in the near future. For now, however, I just have one question that I couldn’t seem to find an answer to in your material:

I applied for and received an EIN number. I would like to apply for non-profit status with my state and the IRS. However, the $125 and $850 fees are discouraging right now.

My question is this: Can we just start running our co-op before we apply and then save money to apply for non-profit?

And then if the answer is yes, what are we until then for tax purposes…do we have to file taxes in 2013 just as a business and just show $0 profit and $0 taxes owed?

Lynne D in PA

 

 

Lynne,

Great question!

Yes, you can organize and operate as a nonprofit for a while and save up some money to apply for tax exempt status.

The IRS expects nonprofit organizations to apply within 27 months of formation. If you file for nonprofit corporation status in your state, then the day you become incorporated is the date of formation. It is sort of like the organization’s official birth date.

The IRS will grant you tax exempt status from the date you incorporate. It’s kind of like “back dating” your tax exempt status.

You should not consider yourselves as a for-profit business if you are organized (meaning have a board and bylaws) and operate (no profit motive, no one pocketing the profits) as a nonprofit. You can call yourself an “unincorporated nonprofit.” You do not need to file a business tax return.

So, the bottom line is that you can start and run your co-op for about a year, maybe close to two years, and then apply for tax exempt status with the IRS.

I hope that helps!

 

Carol Topp, CPA

Comments

  1. I’ve read your books and really appreciate the information. I went back to get clarification from the books when I became a little confused by your answer to this question of Feb. 11, 2013 but I was not able to fully assuage my concerns. When you say you have 27 months from when you file with your state for incorporation as non-profit to file with the IRS, is that only if you want the IRS to grant 501c3 status retroactively to your date of incorporation? My concern is that I would like to file as a nonprofit with my state so I can get the protection afforded by incorporation but I don’t anticipate seeking 501c3 within the next 27 months and I just need to be sure that is not a deadline to file after becoming a non-profit with the state. Your clarification is much appreciated.

  2. Carol Topp says:

    Tiffany,
    If you do not file for tax exempt status with in 27 months of the date of your formation (nonprofit incorporation), then the IRS will only date your tax exemption to the date they receive your application, not back to when you were formed.
    If you do not have tax exempt status, then you need to be filing a corporate income tax return (Form 1120) and pay corporate income tax on any surplus you have.

    If you plan to file for tax exempt status then you should file an annual 990N (the IRS electronic postcard) every year until you tax exempt status is granted.

    Lately I have helped several nonprofit clients that formed years ago and were not filing the 990N each year. Now the IRS is making them go back and file corporate income tax returns, even though they have been nonprofits.
    I am now telling ALL nonprofits (even one like yours that is delaying filing for tax exempt status), to PLEASE file the 990N EACH year or it will be unpleasant when you do apply for tax exempt status.

    Carol Topp, CPA

  3. Carol,
    Our homeschool co-op meets in SC at a church 20 days through out the year. The question of becoming a non profit came up because we were wanting parents to pay for classes through PayPal and of course we are not a business or non profit for their percentage fees. So the question has risen. We don’t have bylaws but we have a board. Do we need nonprofit status for legal protection? For PayPal? We have never filed anything. ???

  4. Carol Topp says:

    Nonprofit status is helpful for formalizing your group as a nonprofit and not someone’s for-profit business.
    Most small groups like yours start out, by default, as unincorporated associations. Leaders in these type of groups are completely unprotected legally. They are personally responsible for what the organization does (or fails to do!).
    If you set up your group as a nonprofit corporation, then there is some legal protection for your leaders.

    Then, there are some financial benefits (like lower Paypal rates) and tax benefits if your organization is eligible for tax exempt status with the IRS.

    I recommend you start by reading the articles on nonprofit incorporation, tax exempt status and creating bylaws on my Leader Tools page. That’s a good place to start learning.

    Carol Topp

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