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

Should your homeschool group be collecting sales tax?

Sales tax. Ugh!! As if dealing with the IRS and income tax isn’t enough of a headache, your homeschool organization might need to be collecting and paying sales tax as well!

From the Church Law and Tax blog comes some helpful information about sales tax that applies to homeschool organizations.

Sales taxes are collected in 44 states. Each state has a different sales tax statute and exempts certain types of purchasers from the payment of sales tax.

Some states exempt any organization with 501(c)(3) status from paying sales tax on purchases. Other states offer limited sales tax exemptions.

Collecting Sales Tax

But I’m not talking about paying sales tax when you buy stuff like paper towels or microscopes.

I’m talking about when your homeschool group sells stuff (aka tangible personal property).

What kind of stuff? How about:

  • Text books (some states exempt textbooks form sales tax.)
  • Tickets to drama performances (yes, some states add sales tax to ticket sales!!)
  • Food sales (in some states food sales, especially snack foods and soft drinks are sales-taxable)
  • T shirts, even if they are a fundraiser!

The rules for when an organization is exempt from collecting sales tax are different form the rules about paying sales tax.

Most states do not exempt churches from collecting sales tax on taxable transactions. As a result, a church that conducts taxable transactions is required to have a sales tax permit.

Most states have a nuisance exception to the requirement of having a sales tax permit, which allows churches to have taxable sales a couple of days a year without the requirement of collecting sales tax. Since every state is different, you should check with your state revenue department. (Source: https://www.churchlawandtax.com/web/2008/september/exceptions-to-exemption.html)

 

For example: In Ohio a homeschool co-op with 501(c)(3) tax exempt status can buy things (like books, supplies, etc) without paying sales tax.

But Ohio only allows nonprofits 5 days a year to hold sales without collecting sales tax. It’s kind of like they are saying, “use those 5 days wisely…you only get 5 sales-tax free days to sell stuff each year!” So maybe the co-op wants to have a big fundraising event and sell items. That’s one of the 5 days they can sell items and not have to collect sales tax.

 

Sales Tax on Fundraiser Sales

You may be thinking your homeschool group can avoid collecting sales tax because you only sell things as part of a fundraiser. Sorry, bed news…

Virtually any form of fundraiser that involves the sale of a product will also require the collection of sales tax. (Source: https://www.churchlawandtax.com/web/2008/september/exceptions-to-exemption.html)

Sales Tax Laws vary by State

Each state has different rules about how and what they apply sales tax to and what organizations can be exempt from collecting sales tax.

It will take some detective work to figure out what your state’s rules are! It’s one of the headaches of living in a country with 50 states (and Washington DC!).

How to Get Help

  • Start with your state’s department of revenue website. Look for words like “sales tax” and then “exemptions” Then look for words like “nonprofit” and “exemption.” Happy reading. The states don’t make it easy to find the exceptions to taxes!
  • Google “Sales tax exemption nonprofit YOUR STATE” and start hunting.
  • I find TaxJar.com and Avalara.com are two helpful websites with information on sales tax.
  • Contact me, Carol Topp, CPA. I’ve done the detective work for several states (about 30) and can sometimes help you or at least point you in the right direction. I charge a fee for this research of $50.

Carol Topp, CPA

HomeschoolCPA.com

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.

 

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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Nonprofit Incorporation for Your Homeschool Co-op

 

Should your homeschool co-op be a nonprofit corporation?

This podcast is an excerpt from a workshop titled Homeschool Co-ops: How to Start Them, Run Them and Not Burn Out.

In this short podcast episode (12 minutes) Carol Topp, CPA explains the benefits of forming your homeschool co-op as a nonprofit corporation and why a leader would want limited liability protection.

 

In the podcast Carol mentioned other podcast episodes in this series. Find them (#121-125) at HomeschoolCPA.com/Podcast

 

Featured resource

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

Click Here to request more information!

Carol Topp, CPA

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What homeschool expenses can I deduct on my taxes?

Here’s a list of homeschool expenses you can deduct on your federal income tax return (Form 1040):

1.

Yes, that’s the list! It’s empty. There are NO homeschool expenses that you can deduct on your individual federal income tax return.

(Sorry for the click bait in the title!)

Homeschooling expenses are personal expenses, like groceries or clothes, and are not tax deductible on the US federal income tax return.

You cannot deduct your groceries or your clothes on your tax return and you cannot deduct your homeschooling expenses on your federal income tax return, either.

A few states may allow a tax deduction, a tax credit, or an educational saving account. But not your Uncle Sam (the US federal government).

 

Clever ideas to dodge taxes (that won’t work)

Sometimes homeschool families try to get clever and think that they will form a homeschool business and deduct the expenses. The idea is for the dad to hire his wife to teach their children. Then they can deduct school supplies, the mom’s wages as a homeschool teacher, etc.

Sounds pretty clever, huh? Except it doesn’t work anymore than paying mom to cook and feed the family by running an “in-house restaurant” won’t work. That’s because in both these plans (homeschooling as a business and in-house restaurant) there are no customers that are paying for the mom’s services.

Also, the mom has to declare her income to the IRS and she will have to pay taxes on it! That’s why families don’t hire mom to run an in-house restaurant and they shouldn’t hire mom to homeschool the kids either.

So forget the idea of forming your family homeschool as a business.

Homeschools as private school. Any tax breaks?

Some states treat homeschools as private schools, so some families think they can avoid taxes by declaring their private homeschool as a nonprofit organizations and get tax exempt status as a private school. That’s pretty clever too, huh? Only it won’t work.

Briefly, a nonprofit organization exists to serve a group, not an individual. The IRS will not grant “recognized charity” 501(c)(3) tax exempt status to a group that is formed solely to benefit the founder’s family. A tax exempt organization must serve a public good.

The IRS forbids private “inurement” in 501(c)(3) tax exempt organizations. Inurement means to be beneficial or advantageous. Inurement occurs when an organization is formed or operates with an incorrect charitable purpose that allows individuals in control to directly and personally benefit from the organization. 501(c)(3) organizations can lose their tax exempt status for practicing inurement.

So forget the idea of your family homeschool becoming a nonprofit organization.

 

In the end, do what the rest of use do, pay your taxes.

Don’t look to Uncle Sam to give you a tax break because you choose to educate your children at home. Instead appreciate the freedom we have an Americans to homeschool.

 

Carol Topp, CPA

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

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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What Does It Take to be a Nonprofit?

 

It takes two things to be a nonprofit. Do you know what they are?

Which one are homeschool leaders doing well and which do they mess up most often?

HomeschoolCPA, Carol Topp, will explain what it takes to be a nonprofit in this short podcast episode (13 minutes).

In the podcast Carol mentioned that she offers consultations with your homeschool group leadership via phone or conference call.

To schedule a private phone consultation with Carol Topp, the Homeschool CPA visit: http://homeschoolcpa.com/services/consultation/

 

 

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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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