Summer reading to be a better homeschool leader: The IRS and Your Homeschool organization

Summer is a great time for homeschool leaders to catch up on some reading. I’m highlighting a book each week of summer and this week I’m spotlighting,

 

I know it’s not a catchy title, but it explains what the book is about. I have no expectations of this book ever being a best seller (!), but I wrote it to be helpful to the hundreds of homeschool organizations that need to understand tax exempt status.
This book began in 2008 under the title of  Tax Exempt 501c3 Status for Homeschool Organizations with a cover as boring as the title. It was an ebook with only 51 pages.
TEx501c3Cover
In 2011, I expanded the book to 124 pages and changed the title to The IRS and Your Homeschool Organization with the subtitle Tax Exempt 501c3 Status for Homeschool Organizations. And I improved the cover.

IRS and Your Homeschool Org cover

After the IRS simplified the process to apply for 501(c)(3) status in 2014, I updated the book. The second edition includes a chapter on getting tax exempt status reinstated if it is revoked. I also added an index to make finding specific topics easier.

 

Who should read this book?
  • Anyone running a homeschool organization that’s been around a long time but has never filed anything with the IRS.
  • Anyone who mistakenly thinks they don’t have to do any annual reports to the IRS.
  • Anyone who fears their previous leaders did not do things properly.
  • Anyone starting a new homeschool organization and wants to be sure they are set up properly.
 Carol Topp, CPA

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How to file the IRS Form 990-N video

 

 

Steve from Nonprofit Ally created a short (6 minute) video) of how to file your Form 990-N Annual Information Return for tax exempt organizations. What the IRS calls the ePostcard.

 

It’s nice of Steve to create this video so you know what information you need and what the IRS will ask.

My pet peeve: Steve calls it “filing your nonprofit taxes.” The Form 990-N is not a tax form. The Form 990 is called an information return because tax exempt nonprofits don’t file tax returns.* They are exempt from taxes.

Actually the IRS calls the 990-N a Notice because all you’re really doing is notifying the IRS that your small tax exempt organization still exists.

But that’s just me being a picky, precise CPA.

Carol Topp, CPA

*Some tax exempt organizations with unrelated business income may pay taxes on their unrelated income.

Tax deductible donations without IRS determination letter

We have an EIN and file 990-N annually but fall under the classification of a group self declares our tax exempt status because we make less than $5,000 a year. We have not gone through the formal 501(c)(3) application process with the IRS. I was talking with IRS today and I believe I understood them to say we cannot give a form to a donor stating their contribution is tax deductible.

If that is the case how can we assure potential donors we are tax deductible and doesn’t a donor need documentation for when they file their taxes?

Mark

 

Mark,

One of the major drawbacks for small 501(c)(3) organizations who chose to “self-declare” their tax exempt status is that they lack the official IRS determination letter proving that donations are tax deductible (See the photo above for an example of the IRS determination letter).

This important letter can give donors assurance that their donations are indeed tax deductible.

Technically, your organization can still receive tax deductible donations, but your organization lacks “proof” to show a donor.

A donor must keep a record if the donation is more than $250. This record is usually a letter from the charity, but a bank record (a cancelled check) may suffice. This record is only given to the IRS if the donor is being audited by the IRS.

Your homeschool group may be listed in the IRS database of Exempt Organizations since you have been filing your  Form 990-Ns every year. Visit IRS Select Check and see if your can find your organization listed as “Has filed Form 990-N” or “Are eligible to receive tax-deductible charitable contributions.” If you are in the IRS database you can be assured that you can accept tax deductible contributions.

The best way to assure potential donors would be to file the Form 1023-EZ (fee $275 to the IRS and takes about 3-4 weeks). Then you get the official IRS determination letter.

I can assist you in filing the Form 1023-EZ. While it is a much simpler form than the full Form 1023, it can be confusing and you will want to be sure it is filed correctly.

Email me if you’d like my help.
Carol Topp, CPA

Q&A: Adding another program under your homeschool group’s umbrella

Super Bowl LII is over. Did your team win? Perhaps your homeschool group is considering adding football team.

Tricia, a treasurer if a homeschool program in Texas asked questions here and here about adding a football program. The homeschool group has 501(c)(3) status with the IRS.

She had several questions about tax exempt status and financial oversight.

  1.  What steps with the IRS do we need to follow to bring them under our homeschool group’s tax exempt umbrella?
  2. What forms would we need to file?
  3. Would they share our tax ID number or would they need their own?  What are concerns should we consider in doing this?
  4. The benefits to our members are obvious, but we don’t want to overlook concerns if there are any.  They would handle their own bank account, but how much would we need to manage?

 

Tricia,

I read your 501(c)(3) tax exempt application given to the IRS and see that sports teams was part of your mission. That’s good, because you do not have to approach the IRS and ask for permission to add the football program; it was included in your original tax exempt application.

Here are my answers to your questions:

1. When you file your 990 or 990-EZ Annual Information Return with the IRS, you simply list the football program as one of your programs. If your gross revenues are under $50,000 per year, you’ll file the simple Form 990-N and no explanation is required.

2. There are no additional forms to file beyond the annual Form 990/990-EZ or 990-N. That’s because sports teams was part of your mission in your original tax exempt application.

3. Use your main group’s EIN (tax ID number). The football program is just another activity run by the main group, so you should expect the typical concerns such as: Are they following policies, being careful, keeping good financial records and practices, etc? My book Money Management in a Homeschool Organization can help in this area.

4. Your main organization should have oversight of the football program’s bank balances. This includes allowing you, as the main group’s treasurer, access to their bank account online and require they give you a monthly bank reconciliation report and monthly reports of the income and expenses.

This may be a lot of extra work for you as a volunteer treasurer, so you may need to hire a bookkeeper or recruit more help from volunteers.

Tricia asked her questions by email. I can do that  for your homeschool program, but it is very time consuming to read and reply to emails. I charge a reduced rate of $50/hour to read and reply to emails. Or perhaps a phone call would be better. Contact me to arrange a private phone consultation.

Carol Topp, CPA

 

Sponsoring a football program under your homeschool group

 
 Super Bowl LII is a few days away! Even though the Green Bay Packers will not be playing (I’m a Packer fan) football is on my mind! Perhaps your homeschool group is considering adding football team. Read on!
I wrote to you about starting a football league and wanting to have a “fiscal sponsorship.”  We postponed the sponsorship last year, but are now wanting to move forward with it.  This has given us new things to consider and I am really out of my league.
  • We are wanting the football program to have a separate bank account from the main checking account, but of course have all the books open and reports/statements submitted to us.  Kind of they way some Boy Scout Troops work with their charter. Will this be a problem?
  •  Will we be able to purchase equipment and supplies for the team using our 501c3 sales tax exemption?
  •  Will businesses be able to make donations specifically earmarked for the football program and then be able to receive a tax deductible letter from us, the main organization?
  • We are planning on purchasing insurance covering the players and cheerleaders. Would the main group need to be on that policy also?
  •  If the football program ever desired to become independent from the main group, would it be able to retain the assets i.e., playing equipment?
I am very overwhelmed at the responsibility involved as a volunteer treasurer. Other board members seem to think I’m overthinking all of this, and that it is no different than a boy scout group and it’s no big deal to get set up–just file some forms and use our tax id to open a bank account for the football program.  I don’t see it as that simple.
Thank you, Tricia
Trisha,
The football program does not have to be a separate legal identity. It can be one of the programs you operate as the main group. Here’s my  reply to your questions.
  • A separate bank account is fine. It will use the main group’s EIN and belong to the parent even though the football program leaders may be signers on the checks.
  • The football program can use the main group’s 501c3 tax status to purchase equipment (sales tax free).
  • Donors can make donations to the football program, but checks should be made out to the main group. You are then obligated to set aside these donations as “restricted funds” only to be used for the football program.
  • Your homeschool group needs to be the owner of the insurance policy because the football program has no separate legal status to buy insurance.
  • All assets belong to the main group, not the football program. If your homeschool group wishes to make a gift to the football program when they split off, it can or you can sell the assets to the football program at a reduced price. I recommend you put something in writing in your fiscal sponsorship agreement about who owns the assets, but leave it up to the board to decide when the time comes whether to sell or gift the equipment to the football program.

I agree with the board; you might be over-thinking this. While it’s good to do your due diligence, it should be pretty easy to add the football program to your homeschool group’s activities.

I do recommend you write up an fiscal sponsorship agreement. Here’s a website with a few examples. I also attached an example I found at Mr Colvin’s law firm website, http://www.adlercolvin.com/index.php You can simplify the language if you wish.

I hope this allows you to sleep better tonight! 🙂

Carol Topp, CPA

Followup: Tricia had additional questions concerning sharing the tax exempt status of her organization and the finances of this new program. Read more here.

Adding a football program to a homeschool organization

Super Bowl LII is a little over a week away! While my beloved Green Bay Packers will not be playing 🙁 football is on my mind! Perhaps your homeschool group would like to add a football or other sports program. Read on!
We are a homeschool organization with 501(c)(3) tax exempt status and have been approached by a new member to start a football program. He is interested in starting a football league for our members. He discovered we are a 501c3 organization and our status could help him.

 

I am a little hesitant in sharing our status with a program that is yet to be established.  However, we like the idea of our boys having the option to play football.  He wants to start practices NEXT week and wants to use our checking account for depositing the funds paid by parents.

 

On top of all the other responsibilities of budgeting the events we provide, I’m at a loss as where to begin in this new endeavor or if we should?  Would he need a board of directors?  By-laws of his own?  Would we umbrella this league?  I don’t know where to start or how to advise him.

 

I’m not sure I can take on more responsibilities, especially one this large.  Can you offer advice or point me in the right direction as how to proceed?  I am thinking perhaps he should be independent for a year to “prove himself” before we allow him under our 501c3 status?
Trisha

Tricia,

Wow, nothing like pressure to make a decision!

What the football coach is proposing is called a fiscal sponsorship, i.e. using your 501(c)(3) tax exempt status as an umbrella he can fit under. Usually the sub organization pays a fee 1%-10% of their revenue to the parent organization.

There are pros and cons to a fiscal sponsorship arrangement. It can be temporary, just a year or two until the football program is spun off to be independent.

I recommend a book called Fiscal Sponsorship: 6 Ways to Do It Right by Greg Colvin. http://fiscalsponsorship.com/ the book and the website will help a lot.

You definitely want the fiscal sponsorship agreement written up and signed by both parties so that everything is clear.

You could set up the football program as one of your activities. This increases the risk to your group (football is a risky venture because of potential injuries). Make sure your insurance allows a football program; it may not.

Or you can require his organization have a separate board, bylaws, insurance, etc.  Ask to see the list of board members, minutes of meetings, bylaws and most importantly the insurance policy.

Don’t be pressured into making a decision just because he wants to start the program now. Poor planning on his part does not constitute an emergency (or quick decision) on your part.

 

Tricia asked her questions by email. I can do that  for your homeschool program, but it is very time consuming to read and reply to emails. I charge a reduced rate of $50/hour to read and reply to emails. Or perhaps a phone call would be better. Contact me to arrange a private phone consultation.

 

Carol Topp, CPA

 

Follow up: Tricia’s homeschool organization postponed the sponsorship for a year and in the following year started a six-man football team and it was very successful.  They even added cheerleaders!

Read additional questions and answers Tricia had about operating a large program under her homeschool group’s tax exempt umbrella.

 

What is the IRS planning to do in 2018 for tax exempt organizations?

The IRS Exempt Organization (EO) released their 2018 work plan. It reviews what they did in 2017 and what they will focus on in 2018.

(Note: this is not the individual or business part of the the IRS. This is only the tax exempt part of the IRS.)
Here’s an excerpt that affects homeschool tax exempt organizations:

IRS EO expects to receive an increased number of determination applications in FY 2018. In early 2018, the EO will implement revisions to the Form 1023-EZ, including a required activity description and additional questions on gross receipts, asset thresholds, and foundation classification. As a result of these changes, EO expects the average processing time for a Form 1023-EZ to increase. EO will continue pre-determination reviews of a statistical sample of Form 1023-EZ applications and will continue to analyze the data from these applications to mitigate risks and identify opportunities to improve this form and its instructions.

Okay, now in plain English, the IRS EO (Exempt Organization) will:

  • Ask for a short description of your activities when applying for 501(c)(3) status using the short Form 1023-EZ.
  • They will ask more questions about:
    • Your gross receipts (your sources of income)
    • Your assets (what you own) and
    • what kind of foundation you are. Most homeschool groups are public charities and not private foundations, so most likely this won’t affect you.

The IRS expects it will take longer to get 501(c)(3) approval using Form 1023-EZ. Right now it takes about 2-3 weeks.

They will still randomly sample some 1023-EZ applications and decide if they need to make changes to the form in the future.

 

If your homeschool group has questions about tax exempt status or would like to apply for tax exempt status, please contact me.

Carol Topp, CPA

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Classical Conversations community rejected by a church

Hi! I am a Classical Conversations Director in Illinois. Our church is asking us to leave as they believe hosting us threatens their tax exempt status. Other churches who have heard this claim do not want to accept us. Any advice? -Kimberly in IL

Kimberly,

I’m very sorry to hear about your problems with finding a church host.

The church is probably worried about their property tax exemption in Illinois since your Classical Conversations (CC) community is a business and not a religious or educational nonprofit.

Property tax exemption is different from federal income tax exemption granted by the IRS. The IRS grants churches automatic status as 501(c)(3) religious organizations. That’s not what is being threatened here.

Property tax exemptions are determined by the state and sometimes the county laws. That’s what has the church worried. If they lose property tax exemption, it will be very expensive for them to pay property tax.

I did a little digging and found some information about church property tax exemption in Illinois. Illinois may deny property tax exemption to the church if an organization using the church’s property has a “view to profit.” Illinois says that having a “view to profit” is incompatible with property tax exemption.

Unfortunately, as currently structured, your CC community has a “view to profit” and the church doesn’t want to offer your group space to meet and risk losing its property tax exemption.

The only advice I have is to ask the church if they would offer space with your CC community if it were a nonprofit organization with a religious and/or educational purpose. Illinois does grant property tax exemption to some educational organizations.

If you wish to re-form as a nonprofit organization, I can help you understand the pros and cons.

Carol Topp, CPA

HomeschoolCPA.com

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Does 501c3 Status Protect Our Homeschool Leaders?

 

What can you do to protect your homeschool group’s leaders?

Does becoming a 501c3 organization help?

In this short podcast episode (12 minutes)  Carol Topp, the HomeschoolCPA, will explains what 501c3 status is and how to protect your leaders.

 

In the show Carol mentioned a Facebook group called I Am a Homeschool Group Leader

She also mentioned some policies for your group to have from HSLDA: https://www.hslda.org/GroupServices/Leaders.aspx/Legal

 

Featured resource

The IRS and Your Homeschool Organization book.

The information in this book has been helpful to homeschool support groups, co-ops, music and sports groups to understand:

  • The benefits of 501c3 status
  • The disadvantages too!
  • What it takes to make the IRS happy
  • Why your organization should consider becoming a nonprofit corporation
  • What is the difference between nonprofit incorporation and tax exemption
  • IRS requirements after you are tax exempt

 

Carol Topp, CPA

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The Difference Between Nonprofit and Tax Exempt Status

 

Do you know the difference between nonprofit and tax exempt status?

The difference can be confusing, so HomeschoolCPA, Carol Topp, explains the difference in plain  English and gives a real life example in this podcast episode.

 

 

Featured resource

The IRS and Your Homeschool Organization book.

The information in this book has been helpful to homeschool support groups, co-ops, music and sports groups to understand:

  • The benefits of 501c3 status
  • The disadvantages too!
  • What it takes to make the IRS happy
  • Why your organization should consider becoming a nonprofit corporation
  • What is the difference between nonprofit incorporation and tax exemption
  • IRS requirements after you are tax exempt

Carol Topp, CPA

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