Are 501(c)(3) and 501(c)(7) the only options for a homeschool group?

We are meeting with support group leaders this weekend and a question has come up about legal status of homeschool groups.

Are 501(c)(3) and 501(c)(7) the only options for a homeschool group?

Dorothy

 

Dorothy,

The IRS has over  20 types of tax exempt status, all 501 (c)-somethings. Everything from Teachers’ Retirement Fund Associations (c)(11), Veterans organizations(c)(19), and Cemetery Companies (c)(13).

501(c)(3) Qualified Charity which includes educational organizations and 501(c)(7) Social Clubs (i.e. support groups) are most common for homeschool groups.

501(c)(4) Social Benefit status fits state-wide homeschool organizations, some homeschool conventions, and politically active homeschool organizations.

In the last 10 years, I’ve seen more and more homeschool organizations operate as for-profit business without nonprofit tax exempt status.

So while there are several options for homeschool groups, the vast majority of homeschool organizations are 501(c)(3)  educational organizations.

Carol Topp, CPA

 

Save

Homeschool groups and huge fundraisers can be a bad thing!

Hey Carol –

I have been perusing your site as we are getting ready to start a new homeschool group (breaking off a larger group) in our area. Based on the info I have read, I feel that we identify the most as a 501c7 social group.

We will be offering clubs, fellowship, and field trips as our primary purpose. As a larger homeschool group, we have sold Discount Cards with local businesses/restaurants giving certain discounts to patrons. We sold them for $5 each. This has been a huge fundraiser for the bigger group. One box of cards is $5,000 (not all profit as there is expense from the printing).

My question is if as a new group we could sell these to help with our expenses and if the UBI would be taxable? We definitely want to do things correctly. The sellers would be the members of the group and done voluntarily.

I appreciate any help you can provide. Thanks!

Joyell

Joyell,
Your organization avoids the UBIT tax because the fundraiser is conducted substantially (or in your case, completely) by volunteers.

But you need to be careful that at least 65% of your total income comes from membership dues. Therefore, a maximum of 35% your income can come from fundraisers. Note that this is income, not the net proceeds of your fundraiser.

Something like this:

Your group’s total income = $10,000

Membership dues (this can include field trip income) must be $6,5000 or more (at least 65% of total income)
Fundraiser income cannot be more than $3,500 (max of 35% of total income)

One of the problems with this type of fundraiser is that it brings in so much income (and of course has substantial expenses as well), it can that it can jeopardize your 501(c)(7) tax exempt status because the fundraiser income exceeds 35% of total income.

This may mean that you are no longer tax exempt and will owe taxes on your surplus each year.

IOW, the IRS requires 501(c)(7) social clubs organizations to get most of their funds from members and not from selling products or other fundraisers.

I hope that helps.

Carol Topp CPA

What? Homeschool support groups cannot be religious?!

church_body_400_clr_8912

Carol,

Our homeschool support group has a statement of beliefs that every member must sign to be a member.

However, I was reading the 501c7 guidelines  for Social Clubs and learned that we cannot discriminate based on religion.

Does that mean in order to be tax exempt we cannot require a belief statement?
Blessings,
Lana in TX

Lana is referring to this IRS statement on Social Clubs. Most homeschool support groups fit the criteria to be tax exempt as a 501(c)(7) Social Club.

The club’s governing instrument may not contain a provision that provides for discrimination against any person on the basis of race, color, or religion.

 

Like many laws, you need to keep reading to see if there are exceptions to the general rule.
And there are some exceptions. The IRS guidelines state:

The statute does not require a club to have a certain percentage, or even any, of its members from different, racial or religious groups. So long as there are no written restrictions, a club does not violate the discrimination provisions. http://www.irs.gov/irm/part7/irm_07-025-007.html

 

But Lana’s group does have a written policy, a Statement of Faith, that every member needs to sign.

Does that mean homeschool support groups cannot have a Statement of Faith?

Read on…

IRC § 501(i)(2) provides an exception for a club which in good faith limits its membership to the members of a particular religion in order to further the teachings or principles of that religion, and not to exclude individuals of a particular race or color.

(i) Prohibition of discrimination by certain social clubs

Notwithstanding subsection (a), an organization which is described in subsection (c)(7) shall not be exempt from taxation under subsection (a) for any taxable year if, at any time during such taxable year, the charter, bylaws, or other governing instrument, of such organization or any written policy statement of such organization contains a provision which provides for discrimination against any person on the basis of race, color, or religion. The preceding sentence to the extent it relates to discrimination on the basis of religion shall not apply to—

(1)an auxiliary of a fraternal beneficiary society if such society—

(A)is described in subsection (c)(8) and exempt from tax under subsection (a), and
(B) limits its membership to the members of a particular religion, or
(2) a club which in good faith limits its membership to the members of a particular religion in order to further the teachings or principles of that religion, and not to exclude individuals of a particular race or color. ( my emphasis added)

 

So, Lana’s homeschool support group can have a statement of faith and discriminate on the basis of religion provided their purpose is to further the teachings and principles of their religion (and they don’t discriminate on the basis of race or color).

Carol Topp, CPA

How can the IRS revoke my tax exempt status when I never applied for it?

TaxExemptRevoked

Carol,
About 15 years ago a couple of moms started a homeschool summer sports group. About 8 years ago, two leaders opened a bank account. The bank set them up with a “Club” account and secured a federal ID number (EIN) for the club. We never applied to the IRS for anything. We never filed any annual reports (the Form 990-N).

Now from reading your website and our emails, it sounds like our tax exempt status was revoked and we need to get it back.

How can something we never had (501c7 Social Club status) be revoked? 

Your help in clarifying this is appreciated, so we know how to move forward.

Lisa

 

Lisa,

I know this is confusing.

Your sports group is a recreational club that fits the IRS definition of 501(c)(7) social club.

501(c)(7) Social Clubs can “self declare” their tax exempt status without officially applying. Technically, you “self-declared” your tax exempt status when you said you “never applied to the IRS for anything.”

Since 2007, the IRS has required all tax exempt organizations, even those that self-declared their tax exempt status, to file the annual Form 990N.  Read more here: http://homeschoolcpa.com/irs-form-990n-faq/

Your organization failed to file the 990-N for three years the and IRS has revoked your “self declared” tax exempt status.

Now you need to file the paperwork (Form 1024) to get back your tax exempt status that you didn’t need to apply for in the first place!

Crazy? YES!
Frustrating? YES!

A lot of small organizations have learned that their tax exempt status had been revoked and they didn’t even know about it!

I don’t think the IRS thought this through. I wish they had not revoked the status of 501(c)(7)s, but they did. I also wish they would allow a simple phone call to get reinstated instead of filing the paperwork and paying the IRS $400 fee.

Here’s the IRS webpage explaining how to get your tax exempt status reinstated. They offer 4 methods.

How to Have Your Tax Exempt Status Reinstated

If you find reading the IRS webpage a bit confusing, feel free to contact me and we can set up a personal consultation by phone to discuss your options.

Carol Topp, CPA

 

How to get added to the IRS database and file the Form 990N

woman_telephone_400_clr_7869

Carol,
We’re a newly organized homeschool support group. Is there anything we need to do with the IRS to establish ourselves as a 501c7 social club, or do we just need to get our EIN and start filing the 990N?

Thanks again! I really appreciate your help. 🙂

Melissa

 

After you get your EIN (Employer Identification Number), you won’t be able to file the 990-Ns just yet.

Self declare tax exempt status

Since you have not applied on paper for 501(c)(7) status  (you can “self declare” 501c7 status and don’t have to file the paperwork), you are 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 990Ns.

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

Tips when calling the IRS

Say something like this,

“We’re a brand new 501c7 Social Club and my CPA said I needed to get added to the IRS exempt organization database, so we could start filing the 990-Ns.”


If you’re a homeschool educational program (co-op, etc)

Or if your homeschool group has an educational purpose, you’re most likely a 501c3 tax exempt organization. Read about the difference between 501c7 Social clubs and 501c3 organizations. In that case, you’ll say:

“We’re a brand new 501c3 educational organization and my CPA said I needed to get added to the IRS exempt organization database so we could start filing our 990-Ns.”

**Note that only 501c3 organizations with less than $5,000 annual gross revenues can “self-declare” their tax exempt status. 501c3s with more than $5,000/year in revenues must apply for 501c3 status using Form 1023 or the new, shorter Form 1023-EZ.


They 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 support 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 (or Articles of Incorporation). So tell them if you have bylaws or Articles of Association/Articles of Incorporation. Samples can be found here.

Finally, if they tell you you must file a Form 1024 to obtain 501(c)(7) tax exempt status, tell them (with confidence) your CPA informed you that you can “self declare” tax exempt status as a social club and do not have to file the Form 1024.

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.

Don’t forget to the the 990-N every year!

Be sure you go online 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. So if you operate on a calendar year, the 990-N is due May 15.

Have more questions about your homeschool organization’s tax exempt status? My book, The IRS and Your Homeschool Organization would be a big help.

Carol Topp, CPA

Save

Save

What is the difference between a homeschool support group and a homeschool co-op?

From the Facebook group I Am a Homeschool Group Leader, came this question:

After much reading, I have come up with a question… What is the difference between a homeschool group and a homeschool co-op?

I took over the leadership of our local, small, informal, unincorporated homeschool group last year. We’re a group of families that meet for unstructured socialization/play time twice a month. We offer classes for all age groups, workshops for moms & dads, date nights/coffee nights for moms & dads, monthly field trips, monthly activity days, and even some on-going activity days. After reading Carol Topp’s book  Homeschool Co-ops, and talking with the HSLDA support group liaison in regards to support groups, I am thinking that the group I am in charge of is a style of co-op. Is this right, wrong, both or neither?

-Jacquelyn

 

I make a differentiation between co-op and support groups because their tax exempt status is different in the eyes of the IRS.

Homeschool co-ops have an educational focus and qualify for 501(c)(3) status as educational organizations.

Homeschool support groups have social interaction and support as their focus and the IRS would classify them as 501(c)(7) Social Clubs.

Here’s an article explaining the differences. It includes a chart comparing 501(c)(3) (co-ops) and 501(c)(7) (support groups). Homeschool Groups As Social Clubs.

501c3_c7Comparison

As homeschooling grows, I’ve seen support groups change into co-ops and co-ops add support activities. Things are not as clear cut as my chart make it seem! So when I consult with a group I ask about:

  • their activities
  • where do they spend their time and their money?
  • what is the source of most of their income and expenses? (that’s how CPA’s think!)

From hearing about their activities and money, I can usually help discern if their group is a 501(c)(3) (educational co-op) or 501(c)(7) social club (support group).

It sounds like Jacquelyn’s group is a support group. Support groups fit the IRS 501c7 social club status and can “self declare” their tax exempt status without officially applying. (educational organizations with more than $5,000 annual gross revenues must apply for 501(c)(3) status).

But the IRS says all nonprofits-even small support groups- are supposed to be filing the annual Form 990N.  Read more here: http://homeschoolcpa.com/irs-form-990n-faq/

For Jacquelyn’s group and hundreds like them, the tipping point comes when the group gets an EIN from the IRS to open a checking account. That’s then the IRS knows about your group and it will need to start filing the annual 990N (it’s online and only 8 question. it takes about 5 minutes once a year).

Important disclaimer: I stated that a co-op is a 501(c)(3) and  a support group is a 501(c)(7), but that is  my interpretation of the IRS tax code. You will not find homeschool groups mentioned in the IRS rules and regulations. (PTL!)  I have discussed homeschool group classifications with IRS employees, read a ton and have attended workshops put on by the IRS. I’m a CPA and homeschooled for 14 years. I still belong to my support group, even though I retired from homeschooling 4 years ago. But I want to make it clear that I am using my CPA knowledge and homeschool experience to help homeschool organizations understand and comply with IRS regulations.

I hope that helps!

Carol Topp, CPA

HS Co-ops Cover_400

P.S. Jacqueline found Homeschool Co-ops: How To Start Them, Run Them and Not Burn Out helpful.

Maybe you would, too.

 

Tax exemption for homeschool group switched by the IRS

Congrats501c3

The Learning Vine, a homeschool organization in North Aurora, IL,  just received 501(c)(3) status from the IRS.

This group had originally applied for tax exempt status as a 501(c)(7) Social Club on their own. The IRS held up their application for a year and then informed them that they should be filing for tax exempt status as a 501(c)(3) educational organization.

Confused? So were the leaders at The Learning Vine. That’s when they contacted HomeschoolCPA.com

I was happy to help this group become tax exempt and continue serving homeschoolers in IL!

Tax Exempt Status for Homeschool organizations

Do you know the difference between 501(c)(3) and 501(c)(7) status? Do you know what 501(c)(3) status could mean for your homeschool group?

This article may help: Homeschool Groups As Social Clubs

Resource for Homeschool Leaders

IRS and Your Homeschool Org cover My book The IRS and Your Homeschool Organization could help your group as well. This 120 page book explains the pros and cons of tax exempt status and how to apply.

Price: $9.95  Learn more here.

Do you have to file to be tax exempt every year?

TaxQuestions
Once you file a support group as a 501(c)(7) social club, does the group have to file this exempt paperwork every year?
Susan R
Susan,
An organization applies only ONCE for tax exempt status.
But, tax exempt organizations must file an annual reporting of their continued existence, Form 990/990EZ or the online 990N every year with the IRS.
It’s a little like passing your drivers license test once, but you must renew your license every couple of years.
Most homeschool organizations file the online 990N and not the longer 990/990EZ because their annual gross income is under $50,000.
If you fail to file the 990/990EZ/990N for three consecutive years, your group’s tax exempt status is automatically revoked! Then you may end up owing taxes. 🙁
Additionally, some states require annual filings as well. Visit Hurwit and Associates to see what your annual filing requirements in your state might be. Pick your state in the drop down menu on the right sidebar.
I hope that helps!
Carol Topp, CPA

Homeschool group offering field trips is lost and confused!

Boys on field trip
We offer field trips, parties, meetups, and classes to homeschoolers.  Each person pays us the fee for the field trip or class, and we pay the venue.  We do not charge membership fees.  Most of our income comes from the chaperone tickets.
I am so lost.  When I took over this business, my predecessor told me that I did not need to file any paperwork at all.  I think I was supposed to file a postcard.  We “grossed” under $10K every year, but more than $5k.  I guess my goal is to be in compliance with any laws.
Jackie

 

Jackie,

Thank you for contacting me.

I looked at your website and I am amazed at the creative things that homeschool parents come up with to help others!  Neat stuff! 🙂

Now it’s up to me to try and figure out where you fit into the IRS nonprofit  structure.

Your group might be classified as a social club.
See this article and chart on how the IRS defines a social club.
http://homeschoolcpa.com/wp-content/uploads/2009/09/HomeschoolGroupsAs-SocialClubs.pdf

The advantage of a social club is that you do not have to apply for tax exempt status with the IRS. Social clubs can “self declare” their tax exempt status. Your previous leader was correct there, even if she didn’t know why!

The IRS does ask that all tax exempt organizations file the Form 990N, ePostcard, annually.
Carol Topp, CPA

What is tax exemption and how do I get it for my homeschool group? Dollars and Sense Show #6

 

DollarsSenseShow6_320pxSq

In this episode of the Dollars and Sense Show host Carol Topp discusses

What is tax exemption and how do I get it for my homeschool group?

In this episode,  Carol  discusses who is eligible for tax exemption (you might be surprised!), the benefits of tax exempt status and the disadvantages.

Listen to the show here

Show Notes:

Your homeschool group may be a nonprofit and not know it! What makes your group a nonprofit?

  • Organized as a nonprofit: board run, bylaws, nonprofit incorporation or unincorporated association
  • Operate as a nonprofit: no profit motive, have a charitable purpose (education), serve a charitable class (children), no inurement (sharing of the group’s money with individuals)

Benefits of tax exempt status:

  • no tax to pay on your surplus,
  • can accept tax deductible donations,
  • may be eligible for grants,
  • some fundraisers like Box Tops only open to tax exempt organizations

Costs of tax exempt status:

  • IRS application fee,
  • nonprofit incorporation in your state.
  • Regular reporting to the IRS and your state.

Different types of tax exempt status for homeschool organizations:

  • Support groups: 501(c)(7) social club
  • Homeschool co-ops: 501(c)(3) educational organization

On the show Carol mentioned several resources:

IRS and Your Homeschool Org cover

Need more information? Visit the Homeschool Leader Tools/Articles page and sign up for her e-newsletter for homeschool leaders:


Tune in for the next Dollars and Sense show on January 2, 2014 when Carol will start a four part series on teaching your kids about money.