Compare 501(c)(3) Charity to 501(c)(7) Social Club

The IRS offers more than a dozen different classifications of tax exempt status.  The most popular by far with 80% of the total is the 501(c)(3) “Qualified charity status.”

Many homeschool organizations may qualify to be 501(c)(3) qualified charities with an educational purpose or 501(c)(7) Social Clubs with a social or recreational purpose.

Here’s a comparison of 501(c)(3) “qualified charity” status and 501(c)(7) Social Club.

In general, homeschool co-ops fall under 501(c)(3) “qualified charity” because they have an educational purpose, while homeschool support groups fall under 501(c)(7) Social Club.

501(c)(3) Qualified Charity 501(c)(7) Social Club
Purpose Religious, Educational, Charitable, Scientific, Literary, Pleasure, recreation, social activities
Examples churches, charities, private schools, homeschool programs with an educational or religious purpose Fraternities, sororities, country clubs, hobby clubs, homeschool support groups
Requirements No private inurement allowed. Upon dissolution all assets must be distributed to another 501(c)(3) organization. Personal contact, fellowship and co-mingling of members. No private inurement allowed.
Activities Can hold programs, sell services and products as part of their exempt purpose. Can provide meals or services only to members in connection with club activities
Tax deductible donations allowed Yes No
Tax exempt (no taxes on profits) Exempt from federal income tax unless the organization has unrelated business income Exempt from federal income tax on income derived from members; other income taxed
Source of Income Membership fees, fees for services, donations, fund raisers, program fees Primarily (65% or more) of the income must come from the membership
Membership Serving the public or the “public good” (i.e. the education of children is a public good) Limited membership and consistent with the purpose of the club
IRS Application Required? Yes, if gross revenues over $5,000/year. File Form 1023 or 1023-EZ No. The IRS does not require 501(c)(7) organizations to file an application. They can “self-proclaim” tax exempt status.
Annual IRS Reporting Form 990-N, Form 990-EZ or Form 990 Form 990-N, Form 990-EZ or Form 990
Legislative Lobbying permitted? Insubstantial lobbying allowed (less than 20% of total expenses). No endorsement of a candidate. No limit on legislative activity as long as it furthers the exempt purpose

IRS and Your Homeschool Org cover

Need more help understanding your tax exempt status?

My book, The IRS and your Homeschool Organization is a good place to start.

If you have specific question about your homeschool program, we can arrange a phone consultation.

I hope that helps!

Carol Topp, CPA

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Are Homeschool Support Groups Automatically Tax Exempt?

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I help homeschool groups file for tax exempt status with the IRS.

Most of them are homeschool co-ops and want 501(c)(3) status as a “qualified charity” because they have an educational purpose and desire tax deductible donations, tax -free profits and sometimes other perks that come with 501(c)(3) status.

But there is another type of tax exempt status that may apply to homeschool support groups: 501(3)(7) Social Club.

Here’s what it takes to be classified as a 501(c)(7) Social Club:

1. Purpose is for pleasure, social or recreation. A nonprofit motive and no part of the net earnings may inure to the benefit of any person having a personal and private interest in the activities of the organization

There must be an established membership of individuals, personal contacts and fellowship. A commingling of the members must play a  major role in the life of the organization.

Common examples include  college fraternities or sororities, country clubs, garden clubs, hobby clubs, etc.

2. Limited membership: membership is limited and consistent with the character of the club

3. Supported by membership fees. In general, your club should be supported solely by membership fees, dues, and assessments. A section 501(c)(7) organization can receive up to 35% of its gross receipts from sources outside of its membership without losing its tax-exempt status. For example, up to 35% of your total revenues can come from fund raising.

4. Business activities. If your club will engage in business, such as selling products or services, it generally will be denied exemption. However, your organization can provide meals, refreshments, or services related to its exempt purposes only to its own members or their dependents or guests.

5. Tax treatment of donations. Donations to social clubs are not deductible as charitable contributions on the donor’s federal income tax return.

Sources:
http://www.irs.gov/pub/irs-tege/rr58-589.pdf
http://www.irs.gov/publications/p557/ch04.html#en_US_2010_publink1000200325
http://www.irs.gov/irm/part7/irm_07-025-007.html

These criteria fit a homeschool support group. The members are limited to homeschool parents (or those interested in homeschooling), meet for social reasons, are supported by membership fees (and maybe a little bit of fund raisers), do not sell products or services and do not collect tax deductible donations.

So most homeschool support groups can be considered 501(c)(7) Social Clubs.

Most homeschool co-ops do not fit this description because they sell services (classes) and have an educational purpose, not a social or recreational purpose. They may qualify for 501(c)(3) tax exempt status as an educational organization.

Confused about whether your organization is a 501(c)(3) “qualified charity” or 501(c)(7) Social Club?

This chart may help: Compare 501c3 to_501c7

Here’s the good news: If your organization fits the bill to be a 501(c)(7) Social Club, you do not have to file the IRS application (Form 1023 or 1024) like 501(c)(3) organizations must. 501(c)(7)s  are allowed to “self-proclaim” their tax exempt status.

Here’s the bad news: The IRS requires all tax exempt organizations for file an annual information return , Form 990/990EZ or 990N.  Failure to file the Form 990/990EZ/990N for 3 consecutive years means your tax exempt status is automatically revoked. Need help getting your tax exempt status reinstated? I can help.

Carol Topp, CPA

Can’t we operate without IRS tax exempt status?

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Carol,

Does my homeschool support group really need to apply to 501(c)(3) tax exempt status with the IRS? It seems like a lot of time and money. We have a small budget and we don’t accept tax deductible donations.

Can’t we just operate as we are?

You described your group as a support group, meaning you exists for the benefit of the members and you do not accept or plan to seek tax deductible donations.

Many larger homeschool organizations, especially co-ops that have an educational function and not just a support group purpose, seek 501(c)(3) tax exempt status for its many benefits:

  • tax exemption
  • ability to accept tax deductible donations
  • ability to participate in fund raisers only open to 501(c)(3) charities

See my article Do we need 501c3 status?

But homeschool support groups are different. They don’t hold classes; they focus on fellowship. Support groups don’t accept donations; they get all their income from membership dues and maybe a little bit of fund raising.

I attended an IRS webinar and asked your question. Here’s what the IRS said:

It is true the Tax Reform Act of 1969 requirement to “give notice,” (to apply for recognition of tax-exempt status) applies only to organizations wanting section 501(c)(3) status.
So, although other types of organizations are not required to file Form 1024, they may still wish to do so in order to receive a determination letter of IRS recognition of their status. Having the determination letter ensures public recognition of their status and may enable exemption from some state taxes.
Also, even though an organization may “self-proclaim” its tax-exempt status, it is still subject to the rules governing its particular sub-section. It is also subject to IRS examination to determine whether it meets the requirements for the exemption it is claiming.

Translation:

If your organization wished to obtain 501(c)(3) tax exempt status, then you must file an application for that. I can help . See my Services page

If  instead, your group fits the criteria of a social club (what the IRS calls a 501(c)(7)), then your organization can “self-proclaim” that you are tax exempt without filing the paperwork.

But you still have to obey the rules and fit the IRS definition of a social club. 

What it takes to be classified as a 501(c)(7) Social Club

And you don’t have a nice letter from the IRS to prove that you are tax exempt.

So there you have it…most homeschool support groups, if they operate as a social club, can be considered tax exempt without going through the time and expense of tax exempt application with the IRS.

P.S. But even if your group does not have to file the application paperwork (Form 1023 or 1024), your organization must still file an annual information return called a Form 990/ 990EZ or the simple on-line Form 990N with the IRS. Read more here: IRS Form 990N FAQ

Carol Topp, CPA

More nonprofits can file the easy Form 990N

2009 Form 990

Many homeschool organizations that have tax exempt status are small enough they do not have to file any tax forms with the IRS. And now new IRS guidelines mean even more groups are free from IRS filing requirements!

Small exempt organizations can file the simple Form 990-N, the electronic postcard, instead of the longer Form 990-EZ or  Form 990.

For tax years beginning on or after January 1, 2010, exempt organizations may file the e-Postcard if their annual gross receipts were not more than $50,000.  The previous filing threshold was annual gross receipts of no more than $25,000. Gross receipts include every dollar your organization brings in, even if it goes out immediately too.

The e-Postcard is an electronic notice filed at http://epostcard.form990.org.

Need help determining your gross receipts? Send me an email and we can arrange a private consultation over the phone. Email me here.

If your tax exempt homeschool organization needs help filing their Form 990EZ or Form 990, I can help. Read more here.

Would your homeschool group benefit from being tax exempt? Find out by reading my articles on the pros and cons of tax exempt status.

Carol Topp, CPA

Are fund raisers harming your chances for tax exempt status?

Many homeschool organizations depend on fund raisers to help run their homeschool co-ops and support groups. These fund raisers could actually harm a group’s chances of obtaining tax exempt status.

True Story:

Julie is treasurer of a homeschool co-op in OK that desires to file for 501c3 tax exempt status with the IRS. I examined her financial statements and saw that the group depended heavily on profit from fund raisers including candy, food and flower sales. These fund raisers required Julie to collect over $12,00o a year in sales. The co-op made a profit of nearly $4,000 every year from their fund raisers.

“It’s a blessing to the co-op, because many of our families cannot afford even the small co-op fees we charge. And friends and neighbors beg us to keep selling our products, especially the locally made food.”

The profit from the fundraisers was actually more than the amount collected in co-op dues.

Unfortunately, with most of the co-op’s income coming from fundraisers and not co-op fees, the IRS may not grant Julie’s co-op 501c3 tax exempt status.

The IRS requires a significant portion of your income come from public support (i.e., the dues from your co-op families) and not from an “unrelated businesses” (i.e. selling products in a fund raiser). The IRS defines “significant” as having more than 1/3 of your income come from public support.

Fortunately for Julie’s group, the IRS has several exceptions. One of them worked for Julie’s group. Her fund raising efforts were all done by volunteers and so the IRS considers that fund raiser as part of the group’s support and they meet the 1/3 test mentioned above.

The IRS rules and exceptions get a bit complicated and both the homeschool leader, Julie, and I did our research. We will be very careful and thorough when explaining the fund raising programs to the IRS when Julie’s co-op files for tax exempt status with the IRS.

If your group has concerns about their fund raising practices, these related blog posts might help:

The IRS’s Word on Fundraising Do’s and Don’ts

The IRS and Fund Raising

What does the IRS mean by not allowing “private benefit” in a fund raiser?

QALeadersCover3DAlso, my ebook, Question and Answers for Homeschool Leaders addresses fundraisers in detail.

Read more including a sample chapter here

Order a copy (in pdf format) for immediate dowload for $8.00 here.

…working to keep you on  the right side with the IRS!

_____________________________________

Finally, attend my free webinar on Fund Raising in a Homeschool Group on Tuesday, November 30 at 8:00 pm EST, 7:00 pm CT. You can listen in on-line and participate in the chat room or phone in and attend the webinar that way. For details on the login in information, phone number to call and workshop handout, click here.

Feel free to tell other homeschool leaders in your area about my webinar. The more, the merrier!

There is no charge for the webinar, except long distance phone charges if you call in .

Carol Topp, CPA

Can a homeschool co-op be denied 501(c)(3) status?

I frequently learn a lot about nonprofit law from Harvey Mechanic’s All Experts Site. Mr Mechanic is an attorney that does a fantastic job of answering all sorts of questions about nonprofit law. I always learn a lot.

Recently, a parent from a small private school mentioned the need to do fundraisers and have everyone “do their fair share.” That is a pretty common expectation in activities involving children like youth sports leagues, scouting, etc. But to my surprise, Mr Mechanic has a problem with the “fair share” idea.

Here is Harvey Mechanic’s reply:

The statement that you made about “fair share” indicates that you do not want to operate properly. The fair share is applicable for a co-operative organization but not a charitable organization. In denying exemption to a purported 501(c)(3) organization booster organization, in 1992 the IRS at
http://viewer.zoho.com/docs/s2ca6g on page 6 stated “The reason you were created and your method of operation indicate that you are made up of a group of parents who have joined together to work cooperatively to provide funds to pay for the participation of their children in athletic events.
The expenses incurred by these children would otherwise have been paid by the parents.  All parents of competitive team members are automatically members of your organization.  Accordingly, members expect to receive a benefit in return for their membership.  You pay no benefits to non-members.

Another, similar denial of exemption was issued by the IRS in 1990 and may be viewed at
http://viewer.zoho.com/docs/a4vd3

Such an operation would be what the IRS calls a cooperative. A cooperative is not qualified as a 501(c)(3) organization. (emphasis added)


IRS and Your Homeschool Org cover

Wow!  So does that mean homeschool co-ops cannot obtain 501(c)(3) status? Oh, no!  I spend a lot of time helping homeschool co-ops obtain 501(c)(3) tax exempt status. I have been successful many times.

I even wrote a book, The IRS and Your  Homeschool Organization, telling homeschool organizations how and why to become a 501(c)(3) organization.

Am I wrong?  Or is Mr. Mechanic incorrect?

Neither.  Or rather, it depends on how your organization is structured and your purpose.  If your homeschool organization is a support group that is “made up of a group of parents who have joined together to work cooperatively to provide funds to pay for the participation of their children in athletic (or educational) events.” you do not qualify for 501(c)(3) tax exempt status. But you can qualify for a different IRS tax exempt status called 501(c)(7) Social Club status.

I am assisting a homeschool support group that has a few co-op classes, but their main purpose is to join together to support each other in homeschooling. They are applying for 501(c)(7) as a Social Club. They will receive many of the benefits of tax exempt status, but not quite the same a 501(c)(3) status.

What about your homeschool organization?  Would you qualify as a 501(c)(3) charity or 501(c)(7) Social Club?

Do you know the difference?

How can you decide? It depends on your activities, purpose and structure.

I can help you sort out the differences.

Please contact me about a phone consultation to help you determine which status is best for your organization.

Do not make the mistake of choosing the wrong tax exempt status.  You could be denied by the IRS like Mr Mechanic mentioned and waste a lot of time and money. It can happen to your group.  Read a real life story here:

http://homeschoolcpa.com/irs-intimidates-homeschool-group

If you need help discerning the tax exempt status of your homeschool organization, send me an email at Carol@HomeschoolCPA.com. We can arrange a private consultation to discuss your particular situation.

Carol Topp, CPA

Hosting a booth at county fair makes history

The San Diego Christian Homeschools hosted an information booth at the San Diego county fair. It was the first time in the fair’s history that a homeschool organization had been featured there.

Leader Lisa Vaca, wrote to tell me about it:

I just wanted to share with you about how blessed we were to be able to host a homeschool information booth at our County fair yesterday. This all happened thanks, in part, to the encouragement and tips of you, Kristen and Denise (of HomeschoolGroupLeader.com) , and thanks to the huge help of Carol with our non-profit filing last year. (You’re very welcome!)

Our booth was a big hit and the organizers of the non-profit booths at our County fair are begging us to return again next summer. We were able to get HSLDA and other homeschool organizations to send us brochures and publications to hand out, plus we got some of our SDCH kids involved in the photography and displays.

Through this Homeschool Info Booth we were able to introduce homeschooling to our community in a fun, new and positive way, and answer the public’s many questions about home education.



Isn’t that a great idea? The San Diego Christians are reaching out to others in their community to share the benefits of homeschooling.

Carol Topp, CPA

P.S. The San Diego Christian Homeschoolers obtained 501c3 tax exempt status (with my help) which gives them extra credibility in the eyes of their community. Learn the benefits of 501c3 tax exempt status for your homeschool group  in this article Do we need 501c3 status?

Small homeschool groups receives official IRS Letter without 501c3 status

Hi Carol,

I know I’ve come across this information on your site before, but can’t find it today.  I am a leader for a smaller homeschool support group (50 families).  Each year, only about $1,000 passes through our bank account.  I have obtained an EIN so we can open a bank account but we are also interested in non-profit status.  The main reason for this is so people can make contributions and also so we can avoid paying sales tax.  I read on the IRS site that we do not need a form 1023 if we have less than $5,000 annually.  If that is the case, how do we prove our non-profit status?

Thank you so much for your help.  Your site has been very helpful to us.

Shelley T, Illinois

Shelley,

Good question.  I decided to call the IRS Tax Exempt Customer Service at (877) 829-5500 on your behalf.  First, Mrs Baker, the IRS employee said that you would have no proof of tax exemption because you do not have the IRS determination letter.  That’s the letter the IRS gives nonprofits after their tax exempt application (Form 1023) is approved.

Then she mentioned that the IRS can send a letter stating that some nonprofits such as yours are small enough that they are not required to file Form 1023. I asked for that letter to be mailed to you.  That’s the closest thing you’ll have to “proof.” At least it will be from the IRS and addressed to your group.

I found your mailing address on your website. Good thing you had an EIN, too.  She verified the mailing address I gave her with your EIN.

Look for the letter in 10-14 business days.

Carol Topp, CPA

Follow up: Shelley received her letter from the IRS 14 days later. It simply stated “We have no record that your organization has been recognized as exempt from federal income tax.” It went on to explain the IRS forms and publications to apply for tax exempt status.  The letter closed with a paragraph explaining that “an organization organized and operated exclusively for 501(c)(3) purposes…does not have to file for exemption unless its annual gross receipts are normally more than $5,000.”

Advice to homeschool leaders:

If you are a small homeschool nonprofit (gross revenues under $5,000 a year), and desire a letter from the IRS explaining that you are tax exempt, do what I did for Shelley and call the IRS.  Request a letter explaining the exemption for filing a Form 1023 for small nonprofits.

If your homeschool organization brings in more than $5,000 a year, it is time to apply for tax exempt status with the IRS (or time to start paying tax on your surplus!). Read more here:

When to become a 501c3?

Questions? Send me an email. I can help!

Carol Topp, CPA

IRS starts revoking tax exempt status May 17

IRS
Homeschool leaders, if your organization has 501c3 tax exempt status be sure to file your annual Form 990N, 990 EZ or 990 or risk losing your tax exempt status. The IRS is beginning automatic revocation of tax exempt status May 17, 2010.

Hundreds of thousands of small non-profits, from Little League teams to community soup kitchens, could lose their tax-exempt status on Monday because of an IRS filing requirement.

The 2006 Pension Protection Act included a provision requiring all non-profits to file an annual return with the IRS.

Previously, non-profits with annual revenue of less than $25,000 were excluded. Non-profits that fail to file a return for three consecutive years lose their tax-exempt status. On May 17, the three-year clock runs out for non-profits that haven’t filed a return since 2007.

The Urban Institute estimates that up to 365,000 non-profits could lose their tax-exempt status if they fail to file by Monday. Groups that miss the deadline will have to apply for a new exemption and pay a user fee of up to $850. They could also be liable for taxes on any revenue earned before their exemption is renewed.

The requirement does not apply to churches or church-related operations.

Non-profits with less than $25,000 in annual revenue can file a 990-N, an abbreviated online form. Completing the online form takes less than 10 minutes, says Tim Delaney, president of the National Council of Nonprofits.

What should you do if your organization loses its tax exempt status?  The IRS says you will need to reapply for tax exempt status.

The IRS as a FAQ page.

And I can help.  I assist homeschool organizations with tax exempt applications.  See my Services page for details.

Carol Topp, CPA

IRS Intimidates Homeschool Group

I have helped several homeschool groups obtain tax exempt status with a 100% successful track record (no one has ever been denied by the IRS). One homeschool group even received their tax exempt status letter from the IRS in only three weeks!  That’s amazingly fast for the IRS; it typically takes 3 months!

But recently a homeschool group in Texas e-mailed me for help. They had applied for tax exempt status as a 501c3 educational organization.  I did not prepare their application, but looked over their website and they appeared to be similar to hundreds of homeschool organizations across the US. But the IRS was going to deny their application, keep their $750 application fee, bar them from applying again and claimed to be building a file to be used against other organizations like them seeking tax exempt status!

This was horrible and could have had a huge negative impact on homeschool co-ops and support groups across the US.  I recommended they speak to the attorneys at Homeschool Legal Advantage. There is a time and a place to hire a lawyer and this was it!

Homeschool Legal Advantage recently e-mailed this update

https://app.e2ma.net/app/view:CampaignPublic/id:8078.2491060969/rid:4166d5ca89236cc41a5c872dd1372e97

As you can read they were a great help to this homeschool organization and resolved the matter quickly with the IRS.

The article mentioned the difference between 501c3 and 501c7 status and you may find that  a bit confusing. Additionally, the groups use of the word ‘co-op’ confused the IRS as to their purpose. What is right for your homeschool organization? How should you present your group tpo the IRS when applying for tax exempt status?

Feel free to email me to arrange a private consultation via telephone.  Each group is unique and an individual consultation will be very helpful

Carol Topp, CPA

P.S. I was so pleased to meet the attorneys with Homeschool Legal Advantage at the Midwest Homeschool Convention in Cincinati in 2009. They were so helpful in desiring to work with homeschool organizations as well as indiviual families.