Taxes for Classical Conversations Directors

Last tax year I was asked a lot of questions about taxes by Classical Conversations directors and tutors. Things like:

  • What tax form should I to use to report my income and expenses?
  • What expenses were tax deductible?
  • What tax forms do I need to give to my tutors?
  • How should tutors be paid?
  • How do I pay myself as a CC Director?

Fortunately, there is an ebook in the works to help CC Directors titled:

Taxes for Classical Conversions Directors

The ebook is available only to Licensed CC Directors from Classical Conversations, Inc

You can find the ebook here

 

I recommend the following blog posts:

CC Directors: Do not give yourself a 1099-MISC

Tax return for a Classical Conversations homeschool business

I’m a Classical Conversations Director. Do I have to file any forms with the IRS?

Understanding Taxes for a small homeschool business

Consult a local small business CPA. To find a local tax preparer I recommend two sources:

Both of these websites allow you to search for a local tax preparer who is knowledgeable about taxes for small sole proprietor businesses.

 

Carol Topp, CPA


Free Resource

In the ebook, I mention a bookkeeping spreadsheet for CC Directors. You can get the spreadsheet now (all it costs is your email!)

 


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How to Find a Local Tax Professional

I like local!

I try to support local businesses and frequently tell tax clients in other states or cities to use a local tax professional.

How do you find a local tax professional?

Here are some tips:

I am no longer accepting tax clients for individual tax preparation, but I can help you with :

  • Business consultations by phone, especially of you operate a homeschool business like Classical Conversations, etc.
  • Nonprofit consultations by phone, especially of you are a homeschool organization or local Cincinnati nonprofit.
  • Assistance with applying for 501(c)(3) tax exempt status, especially of you are a homeschool organization or local Cincinnati nonprofit.
  • Filing annual IRS Form 990/990-EZ for tax exempt organizations

Please contact me via email, tell me a little about your business or nonprofit, and what questions and issues you have. We’ll see if I can help you or if you need to go local.

 

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.

 

Paypal sent homeschool leader a 1099-K. Is it taxable income to her?

 

Our homeschool co-op leader set up a Paypal account to collect payments from our parents. She was very surprised when Paypal sent her a 1099-K for $40,000 with her name on it! Does she have to report this on her tax return even though it was for the co-op?

 

Oh dear. It appears that leader used her personal name and Social Security Number when setting up the Paypal account. She also used her name and SSN when setting up a checking account. This is not good!

This group was in the process of forming  as a nonprofit corporation in her state, getting an EIN for the corporation, and then applying for tax exempt status with the IRS. But the parents starting paying before all the paperwork was completed so the leader simply set up a personal Paypal account. It’s easy to set up a Paypal account (I have 3 Paypal accounts myself). But now she has a tax mess on her hands!

She should have filed as a nonprofit corporation, gotten an EIN and then set up the PayPal account in the name of the new nonprofit corporation with their new EIN. Then the 1099-K would have come to the homeschool group, not her personally.

But that’s water under the bridge.

In the eyes of Paypal and the IRS, the leader has started a business, collected money, and now needs to report that on her income tax return. Ugh!

She should file a Schedule C Business Income on her personal Form 1040 and report the Paypal income as Gross Receipts. At this point the leader should contact me or a local CPA for assistance in preparing her tax return. This is not the year for DIY! She does not want an IRS audit!

Additionally, she needs to set up this homeschool organization properly with nonprofit corporation, getting an EIN, and then applying for tax exempt status with the IRS, ASAP! I can help with that.

Download my list of steps to take to set up a nonprofit homeschool organization.

 

Please homeschool leaders, do not set up Paypal accounts, bank accounts or EINs in your personal name. Establish an organization and conduct business in the organization’s name only. Otherwise, you may face a complicated tax issue like this poor leaders.

Carol Topp, CPA

Is the rent our homeschool group pays to a church a donation?

Our homeschool co-op meets at a church, but they do not want to bill us for rent. The co-op gives a  gift/donation to the church as a thank you and so the church records it that way for their tax purposes.  Do we need to classify our “donation” to the churches as rent?
We have been informed by the church that this would affect their taxes and financial recordings since they are classifying our payment as a donation received. The last thing we want to do is cause problems for the churches sharing their space with us. Please advise/explain.
Kelly
Let me start off by saying that simply calling what you give to the church a “donation” is a simply renaming the payment. Calling your payment a donation does not change the fact that you are giving money to this church in exchange for use of its space. Even if they do not bill you, it is payment for use of space and not a donation. Be honest. Call it what it is in your records: rent. What the church wants to call it is up to them.
I’m not alone in my opinion about this. Attorney and CPA, Frank Sommerville, says

“Many churches try to disguise rents by using other terminology or by claiming that the other organization is simply giving a donation to the church. Other times the church calls it a “cleanup fee” or tells the tenant to pay the janitor directly for his services. None of these name games work. If any amount is paid by the other organization to the church or the church’s workers, then the IRS and state taxing authorities will likely treat it as rent paid to the church.”
Source: Frank Sommerville, JD, CPA https://www.wkpz.com/content/files/Use%20of%20Church%20Facilities%20by%20Outside%20Groups.pdf

But the church is worried about taxes, so let’s address that. The church is worried about two things:

  • IRS federal income tax exempt status as a 501(c)(3) religious organization
  • Local property tax exemption.

Let’s address each concern:

IRS federal income tax exemption.
The church has 501(c)(3) tax exempt status as a religious organization and probably also charitable and educational purposes as well. So long as they stick to religious, charitable, and educational activities their 501(c)(3) status is not in jeopardy.

But renting space is a commercial activity and not religious, charitable or educational. So the IRS considers income from renting space as “unrelated business income” and will charge an unrelated business income tax called UBIT on the profits from the rented space.

Fortunately, there are exceptions to UBIT. Three factors will determine whether the church would owe any UBIT on rental income (See IRS Pub 598 ) :

  1. Whether the group renting the church space helps the church fulfill its mission in some way. There is no UBIT if the tenant’s activities helps the church meet its mission. Your homeschool co-op, if religious in its purpose, helps the church accomplish its mission and the rent you pay would not be an unrelated source of income for the church.
  2. Whether the church is charging fair market value for the space. If they are charging above fair market value, there is a profit and therefore tax to pay.
  3. The church has a mortgage or other debt financing on the building (called debt-financed property by the IRS). If the building is debt financed property, the rental income is unrelated business income and therefore taxable.

If the church determines they have unrelated business income, they will have to file a Form 990-T to declare the unrelated business income. But they are also allowed to deduct any expenses related to the rental income such as utilities, custodian care, etc. Typically the expenses  outweigh the income and so no tax is owed. But the church needs to file the 990-T to prove that don’t owe any tax.
Thanks to http://www.corestrategies4nonprofits.com/nonprofit_core/Go_Ahead_-_Rent_Your_Extra_Space

Kelly’s homeschool group’s purpose (religious and educational) helps fulfill the church’s mission and does not threaten its 501(c)(3) status. The church, if it has a mortgage, may need to prepare a IRS Form 990-T and may (or may not) owe UBI tax on the rental income. So, in other words, it is the church’s mortgage that could cause UBIT, not the fact that Kelly’s group is paying rent to use their space.

Property tax exemption:
The church may be concerned about its property tax exemption from the state or county. In general if the tenant’s mission matches the church’s mission (religious, charitable and/or education), the church’s property tax exemption is not jeopardized.

BTW, if your homeschool group is not a nonprofit organization (meaning it is a for-profit business), using church property could endanger the property tax exemption of the church. The loss of property tax exemption can be in whole or in part; it depends on local and a state property tax exemption laws.

Kelly’s organization is a nonprofit with religious, charitable and educational purposes. It ‘s use of the church building does not threaten the church’s property tax exemption.

Conclusion:
Kelly could go back to the church and determine the basis for their concern. In all likelihood things will continue as usual with Kelly’s organization making a payment to the church as they see fit. I recommend that Kelly record this in her group’s bookkeeping as “rent.” How the church wishes to record it is ultimately up to them, but in my opinion (and other professionals’ opinions), it is not a donation; it is payment for use of space.

Hopefully the church will be honest to the government and prepare the Form 990-T, if required.  This is rendering to Caesar what belongs to Caesar (Matt 21:22). Whether or not the church will owe UBI tax on this money is dependent on if they have a mortgage on the building and the amount of expenses they have.

Carol Topp, CPA

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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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Homeschool support group has problems with bank and IRS

Carol – I just got off with the IRS and I am EXTREMELY irritated and frustrated!!!!! Our homeschool group is a 501c7 social club; we have adopted by-laws. To open up a bank account, the bank wants documentation from the IRS giving proof that we are recognized as a nonprofit organization.

I spoke with two different people at the IRS and the last one was in the tax exempt dept. He and I did not communicate well. He said we had no paperwork in and that I needed documentation for our group. I explained that I had by-laws but he wanted to know if they were signed. I asked if that meant with a signature and he just kept saying the same thing without answering my question.  We kept going round and round with him asking me the same question. Just frustrating!!!

So what do we need to do to be able to get our checking account opened?

Joy

 

Joy,
I’m sorry you had such difficulty with that IRS employee.

The IRS Exempt Organization has lost many of its experienced employees to retirement and to other parts of the IRS managing the Affordable Care Act (Obamacare). And what we’re left with is robots like you talked to. They simply read from a script. I’ve heard several complaints.

Forget the IRS. Go back to the bank. Explain to them that you do not have IRS proof because you are a self-declared tax exempt 501c7 Social club. Bring your bylaws, a list of board members, and your EIN letter form the IRS. Common law states that a nonprofit is formed when you have a board and bylaws.

Proof from the IRS is not needed to establish a nonprofit checking account because the IRS grants tax-exempt status, not nonprofit status. There IS a difference.

Read this article: How to become a recognized Nonprofit

You may need to educate the bank teller. They are frequently misinformed.

Hand them this blog post: http://homeschoolcpa.com/banker-wants-irs-letter-t…

Tell him that 501c7 social clubs can self-declare tax exempt status and do not need a letter from the IRS to prove tax exempt (or nonprofit) status.

Read more about self declaring tax exempt status: Homeschool Groups as Social Clubs

Act informed and confident. You are eligible to open a nonprofit checking account and do not need “proof” from the IRS of self-declared tax exempt status.

Good luck!!

Carol Topp, CPA
Helping homeschool leaders

 

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Tax Exempt Q&A with Homeschool Leaders

 

Have questions about tax exempt status for your homeschool group?

This short podcast episode (16 minutes) from Carol Topp, the HomeschoolCPA,  is an excerpt from the Indiana Homeschool Leaders Retreat. Carol Topp discusses tax exempt status and answers questions from homeschool leaders about self-declaring tax exempt status for your homeschool support group.

 

 

In the podcast I mentioned my book

The IRS and Your Homeschool Organization

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

 

Carol Topp, CPA

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Don’t tell the IRS your homeschool group is a private foundation (if it’s not).

upset_womansquare

Oh this is a sad, sad story.

I’ve seen this twice recently: a homeschool group prepares their own 501(c)(3) application (Form 1023 or 1023-EZ) with the IRS and incorrectly tells the IRS they are a private foundation.

Homeschool co-ops or other nonprofit educational programs are not private foundations. Private foundations are charitable organizations that are funded by an individual, family, or corporation, like the Bill and Melinda Gates Foundation.

Homeschool organizations are public charities, serving the public good (the education of children). Both of these homeschool organizations didn’t think of themselves as charities. They misunderstood that the IRS uses the word charity to include educational organizations. They also didn’t think of themselves as “public,” because they didn’t not understand the IRS use of that word.

The IRS means serving a public good and being supported financially by the “public” (meaning lots of people) but that does not mean you have to open your doors to the general public! You may still have an application process and limit your membership or participation to your programs.

I spend a lot of time with my nonprofit clients explaining the IRS terms and proper classification, but neither of these organizations hired me to prepare their Form 1023/1023-EZ. Neither of them even asked for a phone consultation or for me to look over the application before sending it to the IRS.

Now they have a real mess on their hands.

They have to file an IRS form to change their status. This requires providing financial statements, explanations, and supporting documents and IRS fees.  Meanwhile, they have to be filing a Form 990-PF, which is quite complex. You need an experienced CPA to prepare a 990-PF.

This is going to be expensive and time consuming. It will probably cost hundreds of dollars in IRS and CPA fees to get it straightened out.

Sad, sad, sad…

Carol Topp, CPA

Helping homeschool leaders with tax and legal compliance

 

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