What Homeschool Leaders Don’t Know About 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 understand tax exempt status. It’s easier than ever to get tax-exempt status. Should your group apply?

Listen to the podcast

 

Tax Exempt Status for Small Nonprofit Organizations

Contact HomeschoolCPA, Carol Topp, CPA, to arrange for assistance in applying for 501(c)(3) tax exempt status.  This service involves several telephone calls and e-mails.

Carol offers a variety of services:

  •  IRS Streamlined Form 1023-EZ Application
  • Full 501(c)(3) Application
  • Full 501(c)(4) or 501(c)(7) Application
  • State filings
  • Review of Self Prepared Application

Click Here to request more information!

Carol Topp, CPA

HomeschoolCPA.com

Helping homeschool leaders with tax and legal issues

 

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What Homeschool Leaders Don’t Know About Non Profit 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 understand nonprofit status for their groups. What does it take to be a nonprofit? Only two things! Did you know that nonprofit status is not the same thing as 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!

Carol Topp, CPA

HomeschoolCPA.com

Helping homeschool leaders with legal and tax issues

 

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Accepting in-kind donations of equipment or services

Carol,

My homeschool group (a 501c3 nonprofit) was donated $500 in science equipment. How to I record a gift like this in my record keeping? We use QuickBooks.

 

How wonderful to receive such a generous donation. As a 501(c)(3) tax exempt organization the donation is a tax deductible contribution for your donor.

Thank the donor

First, be sure to thank the donor with a nice letter. State what the donation was (science equipment) but not the dollar amount. Only state the dollar amount when the gift is cash.

And be sure to include this note: “No goods or services were provided in exchange for this donation.”

Understand in-kind donations

A contribution that is paid or given in goods, commodities, or services instead of cash is called an “In-kind” contribution.

Free Church Accounting offers some great information on accepting and recording in-kind donations for small nonprofits like homeschool groups.

There are typically three categories of in-kind donations. They are

  • contributions of tangible and intangible goods
  • use of property
  • donations of services

Tangible gifts in-kind (physical goods that can be touched or held) include: furniture, equipment, food, clothing, supplies.

Example: The donation of science equipment is a tangible in-kind contribution.

Intangible gifts in-kind (goods have value but do not have a physical presence) include: trademarks, copyrights, patents, royalties, advertising.

Example: If a member of your homeschool group lets you print copies of her book or curriculum at no cost she has granted you an in-kind contribution of her copyright.

Use of property include free leased space and discounted rent.

Example: A church lets your homeschool co-op use their building for free.

Professional services given as gifts in-kind include services of accountants and bookkeepers, lawyers, plumbers or electricians, computer programmer, designers, technical support, etc.

Example: One of your members is an attorney and created bylaws for your organization.

Recording donations of in-kind contributions

Some small homeschool organizations don’t record in-kind contributions at all because they do not have to report financial statement to the IRS (they file the Form 990-N) or don’t use accounting software.

But if you would like to record your in-kind contributions in your accounting software here are a few examples from Free Church Accounting

An accountant donates 5 hours a month to do some accounting work that your organization would have had to pay another accountant to do. She regularly charges $100 per hour to do a similar service. To record this gift in-kind you would:

  • Debit Professional Service In-Kind $500
  • Credit In-Kind Contributions $500

Important reminder: Thank your donor for their services, but do not give them a tax deductible receipt for the value of their services. Donors cannot take a deduction for the time that they donated. Only donations of cash, tangible and intangible goods are tax deductible, not the value of services.


A business donates a portable building valued at $12,000. Assuming that your organization has a policy to capitalize assets of this value (meaning you depreciate the value over several years), you would record this gift in-kind like this:

  • Debit the fixed asset account (Portable Building In-Kind) $12,000
  • Credit the In-Kind Contributions $12,000

A person donates an computer valued at $400. Assuming that your organization has a policy to expense assets of this value (meaning you do not depreciate it; you deduct the full amount as an expense in one year), you would:

  • Debit the Equipment In-Kind (expense account) $400
  • Credit the In-Kind Contributions $400

 

Have more questions about properly recording your income, expenses and contributions? My book Money Management in a Homeschool Organization can help.

Or contact me to get help with your accounting set up and transactions. I can refer you to a cadre of homeschool parents with experience in bookkeeping.

Carol Topp, CPA

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Are discounts to homeschool board members taxable compensation?

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My homeschool group gives a fee waiver of our dues to our board officers. Would that discount be reported to our officers as taxable compensation?

Melissa

 

Melissa,

This is an excellent question because I’ve encouraged homeschool groups to offer discounts on membership fees to their volunteers or board members as a way to show appreciation.

The IRS defines compensation as:

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]  (emphasis added)

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

 So free or reduced fees that are educational benefits is taxable compensation to your board members.

So here’s my advice:

  • Keep your fee waivers to board members small and insignificant. The IRS does state that insignificant benefits to volunteers is not taxable income.
  • Consider showing appreciation with noncash gifts such as food, chocolate, or flowers. Buy resources to make their jobs easier including helpful books, hiring a payroll company (your treasurer will love it!), accounting software, etc.
  • Have the amount of fee waivers decided by a separate, independent committee or put it to the vote of the full membership. The board should not vote themselves a fee waiver. Its a conflict of interest.
  • Add a provision to your bylaws allowing a small fee waiver (or tuition discount) to board members or other volunteers. Consider granting a percentage discount instead of a dollar amount such as 20% off the fee.

 


Have more questions about compensation to board members in your homeschool organization?

payingworkerscoveroutlined

Paying Workers in a Homeschool Organization-2nd edition

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

BuyPaperbackButton

 

Carol Topp, CPA

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Government Intrusion and 501c3 Tax Exempt Status for Homeschool Groups

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Hi Carol,

I am part of a homeschool group in Colorado.  We do not have a non-profit status and most people in our group do not want to organize that much.  Some of the people in our group have had some experiences with 501c3 status that the government has made them open their group up to individuals that they would not normally allow in their group because they are a government entity (like permitting someone not in our faith to teach a class).

Thank you so much for your help to the homeschool community and for whatever answers you can give us.

Sincerely,
Michelle P

 

Michelle,
Good for you in wanting to make sure that you are doing things properly in your homeschool group.

Your people are mistaken. Receiving 501(c)(3) tax exempt status does not make your organization a government entity; it simply means that you are exempt from paying income tax on your profit and donors can make tax-deductible contributions.  It’s a tax status.

501(c)(3) status does not mean you  must open up your group to everyone. You are free to set membership requirements and choose who teaches a class. Does a Catholic school have to allow non-Catholics teach in their school?  No. Sometimes a Catholic school may hire non-Catholic teachers, but the teacher usually must agree to uphold Catholic principles.

 

IRS and Your Homeschool Org cover

My book, The IRS and Your Homeschool Organization explains the pros and cons of applying for tax exempt status and the process and tips for getting approved.

The process to become tax exempt is not as scary or as difficult as it used to be. In 2014 the IRS introduced an easier, online application for small nonprofit organizations, the Form 1023-EZ.

 

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.

Here’s a special for the summer. Buy my books for homeschool leaders at 25% off. Get paperback versions for $7.50 (usual price $9.95) or ebooks for $3.99 (usual price is $4.95).

Order The IRS and Your Homeschool Organization


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Adding religious purpose to bylaws and Articles

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Dear Carol

Our homeschool group is currently a 501(c)(3) association that was organized in 1986. Our articles of association were recently found and we find out that we are NOT a Christian group, even though many of us are Christian and we are recognized by the community as a Christian group.
Will switching from a secular to a Christian homeschool cause us to lose our funds in the back account or to cause any fee to be incurred by the IRS?

Becky W

Becky,
It is hard for me to advise you without seeing the Articles of Association or your 501(c)(3) application. If you have electronic copies and can sent them to me, it would be helpful.Your Articles of Association (or Articles of Incorporation) and your 501(c)(3) application define your group’s purpose.

Your bylaws and policy manual are where you you explain how you fulfill that purpose. For example, you might include a Statement of Faith in your bylaws, or a membership requirement that members need to be Christians, etc. It’s very simple to change bylaws. You simply get the board to vote  a change. Follow whatever your bylaws  say is needed to change the bylaws.

Nonprofit corporations that wish to add a religious purpose to their Articles of Incorporation, do that by amending the Articles of Incorporation with their secretary of state. These groups need a vote by the board (as outlined in their bylaws) to make changes to the Articles.

(In Becky’s case, her organization is an unincorporated association and is not required to file any Articles of Association or changes to the AoA with the state).

You asked: “Will switching from a secular to a Christian homeschool cause us to lose our funds in the back account or to cause any fee to be incurred by the IRS?You should not lose your funds, but your board needs to approve all changes to the bylaws and Articles of Association.

You could perhaps contact the IRS (via a letter) if you wish to add to the scope of your 501c3 tax exempt application (i.e add that you have a religious purpose).

If you can dig out your 501c3 application (Form 1023) and read what you originally told the IRS, it would be helpful. The religious purpose may already be  mentioned.

I hope that helps.

 Carol Topp, CPA

Homeschool group not open to the public. Is that allowed?

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On your chart comparing the two types of tax-exempt status for homeschool organizations, under 501(c)(3),  it says membership is open to the public. However, many homeschool groups have membership qualifications. Some require members agree with a Statement of Faith or or not participate in a public-school-at-home program.
Thanks for your insights.

Dorothy

Dorothy,
You asked about membership in your homeschool group being open to the public. You do not have to throw open the doors to your homeschool programs and let everyone in. That could be logistically difficult and it could threaten the safety of the children participating in your programs.

I should clarify that 501c3 groups serve a public good-the education of children- but they may limit membership to their group.

Also, when the IRS determines a group is a public charity (and educational organizations are considered public charities), they mean the organization is funded by the public, unlike a private foundation which is funded by an individual or a family.

Remember, we, as Americans, have the freedom to assemble and that means we can determine who can join our groups and who cannot join. So membership requirements are allowed.

Sorry if that was not more clear.

Carol Topp, CPA

Homeschool leader collecting donations without tax exempt status.

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Our homeschool group leader just opened a Paypal account and has begun asking for donations. This seems a little weird and as though we need to be a nonprofit if money is collected from members. I referred her to your website, but she believes we have nothing to worry about. Is this true? Should we be a nonprofit if money is involved? How can I help her understand the ramifications of not using your resources?
Randi

Randi,

Thank you for contacting me.

Oh dear, your leader thinks she has nothing to worry about! It’s just not that way anymore!

Whenever an organization collects money from either member dues or donations, the leaders have a fiduciary responsibility for managing that money properly. If they do not manage the money properly or get organized properly with the IRS, the leaders can be held personally liable for any mistakes.

This blog posts explains the fiduciary responsibility of leaders: http://homeschoolcpa.com/what-are-the-legal-responsibilities-of-homeschool-leaders/

An organization cannot accept tax deductible donations unless they have 501(c)(3) tax exempt status from the IRS. Most homeschool groups collect membership dues, but those are not “donations” and they should not be called donations.

How can you help your leader be more responsible? Explain that if your group is not properly organized then the money she is accepting will be seen as her taxable income by the IRS and she will have to pay taxes on it!

To get properly organized start by reading a few of my blog posts and articles.

This quick video may help as well: https://youtu.be/FLvfw23z7M0

Good Luck!

Carol Topp, CPA
HomeschoolCPA.com

How to use another nonprofit’s tax exempt status (legally!)

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Hi Carol,
I run a support group that encourages homeschoolers to engage in STEM competitions. We have had students win prize money in the past and we would like to have be able to open a checking account to receive that prize money. Some organizations will give directly to students, others require an educational organization with a W-9. We are considering a DBA  or an LLC, where any prize money would be granted to the group and then distributed via an application process to homeschoolers who start STEM groups.

I am willing to personally take on the prize money as income to me if someone wins and deduct then the tax amount. Since we do not collect any dues, we do not want to file for 501 tax exempt. There is no money to pay the fee. If no one wins anything, we have no income to report.

Would you suggest either the DBA or the LLC, or do you have another suggestion?

Thank you for any assistance.
Blessings to you!

Kathryn

Kathryn,

Thank you for contacting me. You are doing a wonderful thing for homeschoolers!

From what you described, I don’t think a DBA (Doing Business As name registration for a business) or an LLC (a for-profit business) would be the best arrangement. My concern would be that grantors of the prize money would not award funds to an LLC/for-profit business.

Additionally,  accepting payments in your name might not qualify as an “educational organization” to the grantors.

Instead, you probably need to establish an official nonprofit organization (I can help with that) or find another nonprofit organization to take your STEM program under their umbrella. They let you use their tax exempt status and it’s easier than setting up a new nonprofit organization. It’s called fiscal sponsorship and it’s legal, if done correctly.

Learn more about Fiscal sponsorship

Carol Topp, CPA