Self-declared tax exempt status for 501c3 homeschool groups

We are just starting up our group and we do not want to do anything illegal, but we would not qualify as a nonprofit right now, so as per your IRS book, we would be labeled an Unincorporated Association. My question is… Do we need to do anything legally to continue as a group. We do plan to open a checking account and have an EIN number.
I just felt that for a group that is just starting and is not a nonprofit or at the 501 (c) (3) status yet, we don’t know the first steps to get a group of and running and if we need to do anything legally to start. Thank you so much for your time!
-EC

 

Dear EC,

Please watch this video 3 times (yes, 3 times!):

 

You will hear that to legally and correctly set up a nonprofit you need 3 things:

  1. A mission that is not motivated by profit
  2. A board
  3. Organizing documents. Usually bylaws but Articles of Association are also recommended. Get samples here

If you have those three things, your organization is a nonprofit. Congratulations! It may not be a nonprofit corporation; instead it is an unincorporated association, as you mentioned, but it is still a nonprofit.

But, there is a difference between nonprofit status and tax exempt status

Nonprofit status is granted by your state while tax exempt status is granted by the IRS to qualifying nonprofit organizations. Typically nonprofits need to formally apply for tax exempt status with the IRS.

But small nonprofits can self declare  501(c)(3) tax exempt status if your annual gross revenues* are $5,000 or less.

*Annual gross revenues are all the money you take in in a year, even if it just goes right back out. It’s not what is left over at the end of the year. It is not the amount in your checkbook. It is annual (yearly) gross (all) revenues (intake).

This video may be helpful: https://www.youtube.com/watch?v=DCFjnnY7mEw

 

How to self declare 501c3 tax exempt status

Since you have not officially applied on paper for 501(c)(3) status  (you self-declared 501(c)(3) status and don’t have to file the paperwork), your nonprofit organization is not in the IRS database (yet), so you need to call the IRS Customer Account Services at 1-877-829-5500 and be added to their database so you can begin filing the Form 990-Ns.

It typically takes 6 weeks after you call to be added to the IRS database.

Say something like this,

“We’re a brand new 501(c)(3) educational organization and I needed to get added to the IRS exempt organization database so we can start filing our 990-Ns.”


**Note that only 501(c)(3) organizations with less than $5,000 annual gross revenues can “self-declare” their tax exempt status. Organizations with more than $5,000/year in revenues must apply for 501(c)(3) status using Form 1023 or the new, shorter Form 1023-EZ.


The IRS employee will ask for your EIN and organization’s name, address, and probably a contact name.

They may also ask what date your fiscal year ends. Many homeschool groups operate on a calendar year, but some operate on a school year with a year end of June 30 or July 31. Look at the form you filed when you applied for your EIN to see what you chose as your fiscal year end.

They may ask if you have “organizing documents.” They mean bylaws or Articles of Association. So create bylaws or Articles of Association/Articles of Incorporation before you call the IRS. Get the board to approve and sign them. Sample bylaws and Articles of Association can be found here.

Call the IRS early in the morning. They open at 8 am ET and you can usually get through pretty quickly of you call then. Record the date you call, the IRS employee name and their identification number.

 

How to keep your 501(c)(3) tax exempt status

Be sure you go online (IRS.gov/990n) to file the Form 990-N anytime after your fiscal year ends and before its due date which is 4 1/2 months after the end of your fiscal year. If you operate on a calendar year, the 990-N is due May 15.

 

Carol Topp, CPA

Helping homeschool leaders with legal and tax compliance

 

IRS tries to decrease errors in automatic revocations for tax exempt organizations

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Every year the exempt organization (EO) branch of the IRS send out a Work Plan for the upcoming year and reviews what it accomplished in the past year.

IRS Exempt Organization 2017 Work Plan (24 pages)

Here’s something interesting I found:

In FY 2016, EO Determinations focused on its objectives to improve processing of applications and enhance customer satisfaction. We implemented several programs to accomplish these goals.
Erroneous Revocation Prevention: On May 3, 2016, EO Rulings and Agreements formalized procedures to identify and prevent erroneous automatic revocation before the organizations are notified and before the revocations are posted to EO Select Check. Preventing these erroneous revocations eliminates adverse impact to organizations and removes the burden from organizations to identify and notify the IRS of the error. Since March 2015, we have reviewed 13,933 potential auto-revocations and prevented 3,202 erroneous revocations (through June 2016).

In plain English, thousands of nonprofits found their tax exempt status was revoked automatically before the organizations were told (!) and before the revocations were posted to EO Select Check (that’s the IRS online database of tax exempt organizations).

Over 3,000 revocations that were an error! What a mess!

The IRS didn’t get specific about why these organizations had their tax exemption revoked or how they fixed the problem, but I have some ideas:

1. It takes 6-8 weeks (yes, that’s WEEKS, not DAYS) for the IRS to update their exempt organization database so that small organizations can file their annual Form 990-N Information Return. If the organization is granted tax exempt status close to their due date for filing the 990-N, they may be unable to timely file a 990-N because the  IRS takes 6-8 weeks  to update their exempt organization database!

This happened to one of my small nonprofit clients. They had failed to file their 990-N for two years (they didn’t know about the requirement) and the deadline for the third year was quickly approaching. Failure to file your 990/990-EZ/990-N for three consecutive years means automatic revocation of tax exempt status. We were sweating bullets that they could file the 990-N on time. The board president was checking the IRS database daily as the deadline drew nearer. She managed to file the 990-N just days before the deadline! Whew!

If the IRS database of Exempt Organizations were updated in a more timely manner, then there could be fewer erroneous automatic revocations.

 

2. Another small nonprofit told me that they received an automatic revocation letter, but had never received a “You’re late in filing the Form 990-N” type of letter or a warning! This nonprofit had not changed their address, either.

So another thing the IRS could do to reduce erroneous automatic revocation is to mail organizations a reminder and a warning letter for failure to file a 990/990-EZ or 990-N.

I hope my suggestions are what the IRS has put in place.

Carol Topp, CPA

 

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How can I thank my volunteers?

 

It’s the end of your homeschool organization’s school year and you want to thank your volunteers. They work so hard, so you hand out generous gift cards as thank you gifts. You may have just created a tax liability for your volunteers! Carol Topp, CPA, the Homeschool CPA discusses ways to thank your volunteers that are tax-free.

Listen to the podcast

 

Do you have more questions about volunteers and paying workers? I spent at lot of time doing research so that homeschool leaders will know if they are paying their volunteers, board members, and workers legally and correctly. It’s all in this new book:

payingworkerscoveroutlined

Paying Workers in a Homeschool Organization-2nd edition

$9.95 paperback
130 pages
Copyright 2017
ISBN 978-0-9909579-3-5

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Is there a penalty for misclassifying my homeschool group’s workers?

Is there a penalty for misclassifying my homeschool group’s workers?

The IRS imposes strict penalties on an employer who treats workers as Independent Contractors when they should be employees. These penalties have put homeschool businesses and nonprofits out of business. Carol Topp, CPA discusses this topic and some programs the IRS has to avoid crippling penalties.

Listen to the podcast 

Worker Classification Consultation

  • Is your homeschool teacher an employee or independent contractor?
  • Should your homeschool co-op director be paid as an employee?
  • How hard is it to set up a payroll system?
  • What happens if my homeschool group misclassifies a worker? Are their penalties?

Worker classification can be a confusing topic.

My book Paying Workers in a Homeschool Organization can help clear a lot of confusion, but perhaps you want to discuss your particular situation in a private, individual phone consultation.

I offer phone consultations to help you determine if your homeschool organization’s workers are employee or independent contractors. The phone call will be followed up with an email containing a fact-based determination and information to help you take the next steps.

Click Here to request more information!

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Understanding Taxes for a small homeschool business

It’s tax season and I’ve been getting several emails from homeschool business owners, especially Classical Conversations directors, about how to fill out their tax returns.

The IRS has a terrific website called Understanding Taxes that explains how to fill out a simple business tax return.

It’s quite good. I’ve used their simulations when I taught personal finance at my homeschool co-op

Visit these websites to learn how to fill out your Schedule C Business Income and Loss.

Understanding Taxes home page

Simulation of filing a simple business tax return using Schedule C-EZ

Simulation of filing a simple business tax return with a 1099-MISC (this simulation would be helpful for a Classical Conversation tutor who receives a 1099-MISC).

 

You could also try searching Youtube for helpful videos on preparing a business tax return. Here’s one I found:
How to Fill Out Schedule C for Business Taxes He goes over the Schedule C line by line in about 20 minutes.

 

I hope that helps,

Carol Topp, CPA

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Tax return for a Classical Conversations homeschool business

We are a new Classical Conversations community set up as a single member LLC. We only had 2 students and so my tutor’s income was below the requirement for filing 1099s. Same for me. However, I saw that I shouldn’t be filing a 1099-MISC for myself. What should I be doing?

And what is considered profit for a CC community?

Esther

 

Thank you for emailing me your question about taxes and your Classical Conversations (CC) business.

As a single member LLC, you are a sole proprietorship and you report your income and expenses from your CC business on a Schedule C Profit or Loss from Business as part of your Form 1040.

All your income from the tuition and fees charged to your customers (i.e. parents) goes on line 1 Gross receipts or sales. In this example the total income is $4,500.

Your payment to your teacher(s) goes on Line 11 Contract Labor.  In this example a total of $2,250 was paid to independent contractors. Other expenses go in the categories listed in Part II of the Schedule C. Other expenses made the total expenses sum to $2,982 as shown on Line 28.

The profit is shown on Line 31> It is calculated  from Gross Income (Line 7 on the form) minus Expenses (Line 28). The profit is what you get to keep (and pay taxes on!) as the business owner. In this example the profit is $1,518. This amount will carried forward to the first page of the Form 1040 to Line 12 Business income or loss.

This Youtube video may help: https://youtu.be/qd5etmtyn9s It’s not specific to homeschooling businesses or Classical Conversations, but it goes over the Schedule C line-by-line in about 20 minutes.

P.S. I am no longer taxing new tax clients, so I recommend you find a local CPA to help you in preparing your tax return. To find a local CPA or accountant I recommend you try Dave Ramsey’s Endorsed Local Providers and Quickbooks Proadvisors. A lot of CPAs and accountants listed on these sites specialize in small businesses.

Carol Topp, CPA
HomeschoolCPA.com
Helping homeschool leaders

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What Homeschool Leaders Don’t Know About Losing Tax Exempt Status

What Homeschool Leaders Don’t Know About Losing Tax Exempt Status

Carol Topp, CPA, the HomeschoolCPA will share tips on important issues that homeschool leaders may not know about. This episode will focus on helping homeschool leaders know what to do if their organization has lost its tax exempt status.

Listen to the podcast

Does your homeschool group need to pay taxes?

Could they avoid paying taxes by being a 501c3 tax exempt organization? Do you know the pros and cons of 501c3 status? Do you know what 501c3 status could mean for your homeschool group?

I have the answers for you in my book The IRS and Your Homeschool Organization. The information I share in my book has been helpful to homeschool support groups, co-ops, music and sports groups and will help you understand:

  • The benefits of 501c3 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

Click Here to request more information!

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What Homeschool Leaders Don’t Know About IRS Annual Reports

 

What Homeschool Leaders Don’t Know About IRS Annual Reports

Carol Topp, CPA, the HomeschoolCPA will share tips on important issues that homeschool leaders may not know about the IRS Annual Reports. This episode will focus on helping homeschool leaders understand a report that the IRS requires from all tax exempt organizations–including your group! It’s called the Form 990.

Listen to the podcast

Carol Topp, CPA can help with:

Preparation of IRS Annual Return

Preparing the Form 990/990-EZ Annual Information Return for the IRS and your state. The Form 990/990-EZ is due 4 1/2 months after the end of your fiscal year.

This service involves several telephone calls and e-mails and copy of your financial statements (a QuickBooks file is preferred).

I also offer a service I call “Buying Peace of Mind”

This is a a review of IRS forms you have prepared yourself. You can save money by doing much of the work yourself. I will review Forms 1023 or Annual Form 990/990-EZ and offer my opinion and advice.

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Wow Carol!  Thanks so much – just the info you provided here is very helpful.  I look forward to speaking with you as I’m anxious to get started, but I want to do so in the best and most efficient way.  This is new territory for me – so I truly appreciate your guidance!

-Laine Discepoli, Glendale, OH

________________________________________

 

Click Here to request more information!

 

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CC Directors: Do not give yourself a 1099-MISC

I have spoken to several Classical Conversations (CC) Directors lately who tell me that they gave themselves a 1099-MISC to report what they paid themselves.

But this is not correct! CC Directors should not give themselves a 1099-MISC.

I can understand their confusion. These Directors are business owners of a Classical Conversations community offering classes for homeschool students and their parents in how to educate their children using classical methods. Typically, these Directors hire tutors as independent contractors to reach a class once a week and frequently the Directors also teach a class themselves.

They give their tutors a 1099-MISC to report their earned income and so they think they should give themselves a 1099-MISC as well. But this is not the correct way to report income as a CC Director.

As a business owner (and I’m referring to a sole proprietorship filing a Schedule C on their Form 1040) a CC Director is not paid as an independent contractor. Business owners are not “paid” at all. Instead they get to keep all the profit that the business makes. That profit is their “pay” or earnings from the business.

How to correctly report your income from your CC business

One Director told me that she reported her 1099-MISC as her total income on her Schedule C Business Income or Loss. But this is not correct. I explained that she needed to report all the income that the participating families paid her. That amount is her total income, not what she “paid herself” and reported on a 1099-MISC (incorrectly).

“Oh dear,” she replied, “I’ve been doing it wrong for three years!” Yes, she had been. 🙁

I explained that she needed to file a Form 1040X  Amended Tax Return to correctly report her income on her Schedule C for those prior years.

I also advised her to contact a local CPA to help her learn how to correct her tax returns and prepare it properly in the future.

How to correct a 1099-MISC

If you have given yourself a 1099-MISC, then you need to correct it ASAP!

Start by reading IRS Instructions to Form 1099-MISC page 10. Follow the instructions carefully. Check the CORRECTED box. Include yourself with $0 (zero) in Box 7  Non-employee compensation.

I recommend you contact a local CPA to help you file the corrected 1099-MISC.

If you’ve already prepared your tax return with the incorrect 1099-MISC, you’ll need to file a 1040X as well to amend your tax return.  It’s time to get professional help!


Business taxes and paying employees or independent contractors is not a guessing game! There are professionals like CPA and tax professionals who can help you file your 1099-MISC and tax returns correctly.

How to find a local CPA or accountant
I recommend you hire a local CPA or tax professional because they know your state and local laws best. If you do not already have a CPA or tax professional (and I don’t mean a store front tax preparation service) I recommend you try Dave Ramsey’s Endorsed Local Providers or Quickbooks Proadvisors.
A lot of CPAs listed on these sites specialize in small businesses.

Business Consultation

I am not accepting new tax clients, but I will offer a phone consultation for CC Directors, tutors and other homeschool business owners. Contact me to request a phone consultation.

 

Carol Topp, CPA

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Are homeschool co-op fees childcare tax deductions?

littlegirl_in_pink

Carol,

A parent asked me for our tax ID number to give to her accountant for listing out tuition as a childcare expense. Is this common practice? Is it the EIN that she’s asking for? Should I give it to the accountant directly? We are 501(c)(3) state-registered corporation.

–Lisa C

 

Lisa,

The parent is asking for your EIN (Employer Identification Number), but the tuition and fees she pays to your homeschool program are (probably) not tax deductible.

IRS Pub 503 Child and Dependent Care expenses make it clear that tuition/education expenses are not child care and are not tax deductible.

Expenses to attend kindergarten or a higher grade are not expenses for care. Do not use these expenses to figure your credit.
However, expenses for before- or after-school care of a child in kindergarten or a higher grade may be expenses for care.
Summer school and tutoring programs are not for care.

If the child was in preschool at your co-op, then, maybe, the portion for the child’s preschool expenses could be childcare. By the way you may need to check your state laws to see if you are required to be licensed as a daycare.

But the child car tax deduction is only allowed for the parent to work. Was this mom going to work while her preschool daughter was at co-op? If yes, then it’s childcare; if no, then it’s not childcare and not eligible for a tax deduction.

I recommend that you not give her your EIN and explain that her tuition and fees to your homeschool organization are not child care expenses and not tax deductible.

In reality, she could find your EIN on the internet if she knew where to look, but it’s more important that you explain that tuition and fees are not tax deductible child care expenses.

Carol Topp, CPA
HomeschoolCPA.com

 

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