We don’t want 501c3 status. Should we still include the IRS language in the Articles?

We recently formed a non-profit in Texas but do not want to file for 501c3 tax exempt status.  When we created our bylaws your site was very helpful to us.  I thought I read somewhere on your site that it is better to include the IRS 501c3 verbiage from the beginning so that if we ever decided to do that, it would already be included.

I now can not find where I thought I read that.

Do we need to include it anyway or should it be left out if we have no plans on filing 501c3?

Thanks so much,
Cathy

 

Cathy,

The IRS requires their specific language to be included in your “organizing documents.” That’s usually the Articles of Incorporation or Articles of Association if your group is not a nonprofit corporation.

This requirement is found in the IRS Instructions to the Form 1203 Application for Tax exempt Status and IRS Pub 557 Tax Exempt Status for Your Organization (p. 22)

If you have no plans to request tax exemption as a 501(c)(3) charitable or educational organization, then your Articles of Incorporation do not have to include the IRS required language.

 

But, being a CPA, I always think about money and taxes, so I will warn you that without 501 tax exempt status of some kind (501c3 or c4 or c7), your organization must be filing a corporate income tax return, IRS Form 1120, every year and paying  federal taxes on any surplus you had that year. Texas may have a corporate or franchise tax as well.

By the way, that Form 1120 can be pretty complex. You’ll probably need professional help from a CPA to prepare it. You have to prepare and submit this form every year even if you didn’t have any profit! The Form 1120 shows the IRS that you didn’t have any profit!

So, you might want to reconsider your decision not to apply for tax exempt status.

I’m happy to discuss the pros and cons of tax exempt status with your board. Contact me.

 

Carol Topp, CPA
HomeschoolCPA.com

How does the IRS prove my homeschool group’s tutor should be an employee?

 

D. is a leader of a homeschool program, Classical Conversations, who asked me about the worker status of tutors in her program: Should they be employees or Independent Contractors? This question applies to many homeschool groups, not just Classical Conversations.

What evidence would the IRS use to prove an “employee” was “treated” wrong (i.e., misclassified as an Independent Contractor when they should be an employee)? If it’s how much freedom the tutor felt they had, I am confused.

If I hire a independent contractor to paint my walls do I not have full rights to specify how, what color, the time frame I need it done, etc? How can this truly be an issued PROVED by IRS?

-D.
(edited for clarity and spelling)

 

D.,

Let me clear up something.

The IRS rulings, decisions and determinations on worker status are based on common law, not scientific facts.

Common law is the body of law derived from custom and judicial precedent rather than statutes. Common law (also known as judicial precedent or judge-made law, or case law) is that body of law derived from judicial decisions of courts (Wikipedia definition https://en.wikipedia.org/wiki/Common_law)

The common-law system is used in all the states of the United States.

Common law and the IRS does not use the word “prove” as used in science. Instead judges and the IRS make judgements or determinations. Application of IRS regulations and determinations is not science, it’s law and that’s a different mindset.

Things cannot be “proven” in law like they can in science.

Under a common-law system, disputes are settled through an adversarial exchange of arguments and evidence. Both parties present their cases before a neutral fact finder, either a judge or a jury. The judge or jury evaluates the evidence, applies the appropriate law to the facts, and renders a judgment in favor of one of the parties. Following the decision, either party may appeal the decision to a higher court. Appellate courts in a common-law system may review only findings of law, not determinations of fact. Source: https://legal-dictionary.thefreedictionary.com/common+law

I’ve written several blog posts on the factors (or “evidence”) that the IRS considers in making a worker determination. Here’s one: Behavior Control of an Independent Contractor

Behavioral Control, which you mentioned in your question, is only one of the many factors to be considered.

The IRS says,

“Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.”

So citing an Independent Contractor painting your walls is not relevant in determining worker status of a teacher in a homeschool program or Classical Conversations group. They are very different situations.

A better comparison is an adjunct instructor at a local college. The IRS has several rulings about the worker status of college instructors. There have been several court cases involving instructors in an education setting. Reading these court cases and IRS rulings and determinations have led me to the conclusion:

Because instruction is a fundamental component of a homeschool organization, instructors, tutors and teachers should be treated as employees because the homeschool group will always exert control over these workers. (from Paying Workers in a Homeschool Organization by Carol Topp, CPA)

 

If you want more details, my book Paying Workers in a Homeschool Organization will be a big help.

I also offer a Worker Determination service to help decide if your tutors are misclassified as Independent Contractor  when they should be paid as employees.
Carol Topp, CPA

Should a Classical Conversations Director be an LLC?

I am a CC director. I am not sure what is the best option when it comes to register our community. A LLC or as a Sole Proprietor? Thank you so much for your help.

Maria

 

Maria,

By default, if you are the only owner of your business, you are a sole proprietor. You could consider adding LLC status to your sole proprietorship business if you want the limited liability protections that LLC status offers.

The reason that most businesses use the LLC structure is for limited liability. That means the liability is limited to your business and its assets and not your personal assets. I organized my own sole proprietorship accounting practice as an LLC  because I wanted limited liability and protection of my personal assets. LLC status can be added to your sole proprietorship business at any time. I ran my accounting business for 3 years and then added LLC status.

I recommend that you read up on LLC status, how to get it, maintain it (there are things you should do like not co-mingle funds and sign contracts in the name of the LLC, etc) , and what is required in your state regarding fees and reports. Some states charge a one-time fee, some charge a yearly fee and annual reports.

 

Since this is a website mainly for homeschool nonprofit organizations, I will add this note: For a nonprofit organization, such as most homeschool groups, I typically do not recommend LLC status since nonprofit corporation status in your state brings similar protections of limited liability. 

Here is a podcast episode where I discuss Should Your Homeschool Group Be An LLC?

 

But Maria is asking about LLC status for her for-profit business, not a nonprofit organization, and my advice to her may be very different from my advice to a nonprofit organization.

 

Carol Topp, CPA

I am not an attorney, nor am I offering legal advice. I recommend that you seek legal counsel if you have additional questions about Limited Liability Company status.

 

Do CC Directors pay for their own children’s tuition?

Karen, a homeschool leader involved in Classical Conversions asked,

Do Classical Conversations (CC) Directors have to write a check (to themselves) for full tuition for each of their kids?

No. A CC Director does not have to pay her own business tuition for her own children. 

Here’s why:

CC Corporate wants a Director to pay their licensing fee based on student enrollment/tuition collected, so a CC Director should track the total tuition collected INCLUDING HER OWN CHILDREN. That way she is paying CC Corporate the correct amount.

But for tax purposes, a CC Director DOES NOT write her business a check for her own children’s tuition and does not include her child’s tuition in the income reported on her tax return (I’m assuming the Director is operating her business as a sole proprietorship and is not an employee of her own business).

The reason is that a person should not be taxed when they avoid paying for services by providing the services to themselves. It’s called imputed income. There was a court case in 1928 that ruled that the imputed income from produce grown and eaten by a farm owner is not taxable as income to the farmer.[9]

Conclusion: A Director must keep track of the tuition she would owe for her children so that she pays CC Corporate the correct licensing fees, but she does not need to write a tuition check to her business and she should not report her child’s tuition as taxable income on her business tax return.

Carol Topp, CPA

HomeschoolCPA.com

My book Taxes for Licensed Classical Conversations Directors is available through Classical Conversations. Find it  in the Directors Licensing Guide  page 54, Appendix M and click on “this document.”

Can CC Director offered reduced tuition to her tutors?

 

Can a Classical Conversations director gift an Independent Contractor or employee with free or reduced tuition?

Suzy

 

Suzy,
A Classical Conversations (CC) Director can give educational benefits (i.e., discounts on tuition) to Independent Contractors (IC) or employees, but (and this is a big, “but”) the value of these educational benefits is taxable income and must be reported on their W-2 or 1099-MISC.

So a CC director can offer a tuition discount to an IC or employee, but must add the value of that discount to the tax reports she gives to her tutors (1099-MISC or W-2).

And the worker must report her paid wages and the value of this discount/gift on her tax return as taxable income. You should warn her about that in writing and face-to-face, so they aren’t surprised at tax time!

We think that taxable income is only what comes in a paycheck, but the IRS defines taxable compensation to include “educational benefits.”

compensation includes salary or wages, deferred compensation, retirement benefits…, fringe benefits (personal vehicle, meals, lodging, personal and family educational benefits, low interest loans, payment of personal travel, entertainment, or other expenses, athletic or country club membership, and personal use of your property), and bonuses.[i]  (my emphasis added)

[i] Instructions for Form 1023 https://www.irs.gov/instructions/i1023/ch02.html#d0e1909

So, yes, a CC Director can offer free or reduced fees to an Independent Contractor or employee, but it is not a gift; it is taxable income and must be included in their wage and income reporting.

A CC Director should also check her license agreement with Classical Conversations to see if reduced fees are allowed.

If you have additional tax questions about being a CC Director, I wrote an ebook that can help!
Taxes for Licensed CC Directors is available from Classical Conversation. Find it here
Carol Topp, CPA
HomeschoolCPA.com

Small charity grows and gets audited by the IRS for it!

A fellow CPA told me the story of what happened to a small charity.

The small charity thought they were eligible to file the new, easy, short IRS Form 1023-EZ to apply for 501c3 status.

Organizations can use the shorter, cheaper, online Form 1023-EZ if their annual gross revenues are less than $50,000/year and expect to be less than $50,000 for the next 3 years.

So off went the Form 1023-EZ application and the charity was granted 501c3 tax exempt status!

Then they held a fundraiser (or several fundraisers) that were successful beyond their dreams and their total revenue was OVER $50,000 in their second and third year. They filed (correctly) their annual information returns, Form 990-EZ, to report all their income and expenses.

That’s when they got a letter from the IRS.

The IRS was auditing them because the IRS claimed the charity should have filed the longer, more expensive, full Form 1023 when they applied because their annual revenues were more than $50,000/year. And the IRS was right, in hindsight.

The IRS auditor asked for:

  • The full application to be completed (its 26 pages!) along with copies of
  • Bylaws
  • Articles of Incorporation
  • Financial statements for 5 years
  • A narrative explaining the activities of the organization
  • Minutes of meetings

That last requirement surprised me because the Form 1023 application doesn’t ask for minutes of meetings, but the IRS auditor did.

Fortunately this group had those minutes and with the help of their CPA, passed the audit!

Lessons learned:

  • Keep minutes of your meetings.
  • Have all your documents ready in case the IRS asks to see them.
  • If you are close to the $50,000 annual gross revenues threshold and think you could exceed it in your first 3 years, use the full length Form 1023 application form when applying for 501c3 tax exempt status.

 

 

Have more questions about the IRS, 501c3 tax exempt status, and your nonprofit?

Carol Topp’s book, The IRS and Your Homeschool Organization can help!

  • The benefits of 501(c)(3) status
  • The disadvantages too!
  • What it takes to make the IRS happy
  • What your state requires
  • 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

Order here.

 

Carol Topp, CPA

 

When Applying for an EIN, They Want my Social Security Number!

 

Homeschool leader, Paula, was applying for an EIN (Employer Identification Number) online, but the IRS website asked for her SSN (Social Security Number). She is reluctant to give it out. Should she be concerned?

Someone (the “responsible party”) must give their Social Security Number (SSN) so that the IRS can always trace leadership of a nonprofit (or a business) to a human being.

The IRS wants the name and Social Security Number of a specific individual it can contact if needed.

Requesting a name and SSN is also meant to prevent people from setting up dummy or scam organizations.

Listen to this episode (12 minutes) to find out more.

Featured Product:

Money Management in a Homeschool Organization

  • Does your homeschool group manage their money well?
  • Do you have a budget and know where the money is spent?
  • Do you know how to prevent fraud?

This 115 page book will help you to open a checking account, establish a budget, prevent mistakes and fraud, use software to keep the books, prepare a financial statement, and hire workers. Sample forms and examples of financial statements in clear English are provided.

Carol Topp, CPA

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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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My homeschool is a private school. Can I use 529 funds?

I explained in “Can homeschoolers use 529 plans? Maybe!” that you can use 529 savings account funds for tuition paid to a public, private, or religious school.

Some homeschool students take classes from private schools (locally or online). The tuition payments to these schools can use 529 funds without  penalty or taxes.

So that begs the question,

“In my state, my homeschool is considered a private school. So can I use 529 funds for my private school/homeschool expenses?”

No. Sorry!

Here’s why:

The expenses must be to pay tuition. You don’t pay yourself tuition! That would be silly and not tax-smart.

Your other homeschool expenses such as books, curriculum, school supplies, field trips and are not paymnets for tuition and so you cannot use 529 funds without paying a hefty penalty!

Tuition payments to organizations that are not schools like your local co-op, Classical Conversations, etc.  cannot use 529 funds either (without incurring taxes and a 10% penalty!)

Carol Topp, CPA

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.