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.

 

 

IRS requires homeschool support group to have “organizating documents”

phone_white

(Background: Lisa’s homeschool support group decided to officially declare tax exempt status as a 501(c)(7) social club. Lisa called the IRS to be added to their database so that she could file the annual Form 990N as the IRS requires of all nonprofit organizations.)

Carol,

I just spoke with the IRS about being entered into their database.  I am frustrated.  The first question she asked me was whether we have an organizing document. After I said we don’t, but are self declaring 501c7 status, she informed me that unless we have an organizing document, we don’t have standing with them and are not considered an exempt organization, so we wouldn’t file a 990N.

Lisa in PA.

 

Lisa,

How extremely frustrating the IRS can be!

Organizing documents are:

  • Bylaws
  • Articles of Association for unincorporated organizations.
  • Articles of Incorporation for organizations that decide to form a nonprofit corporation in their state.

Most homeschool support groups do not incorporate in their state. They remain unincorporated associations. (Sounds nice and official, doesn’t it?)

Homeschool co-ops or other large groups frequently incorporate as nonprofit corporations in their state and go on to apply for tax exempt status with the IRS.

Read more about nonprofit incorporation:

Your homeschool support group  won’t ever send the IRS your “organizing documents” since you are self-declaring tax exempt status as a social club and do not have to file a Form 1024 to apply for 501(c)(7) status.

But it’s still a good idea for a homeschool support group to have bylaws and Articles of Association. They spell out the foundation of your group’s purpose, membership, and how the board is chosen.

Your homeschool support group could create bylaws or “Articles of Association” (I added a sample to my Sample Documents page) as your organizing documents.

Your board should vote to approve the bylaws or Articles of Association, but you don’t have to file the document with the state or the IRS.
Then call the IRS again, hope for another person this time, and see if you can get into the IRS database.

 

Carol Topp, CPA

 

Are homeschool groups supposed to file the IRS Form 990N?

IRS
I recently visited your HomeschoolCPA.com site and was a little confused by the chart comparison of a 501c3 and a 501c7. In my research with CPA’s in my area and with talking to the IRS, it appears that the filing requirements have changed. It appears that as of 2006, all organizations must file a 990N postcard including a 501c7. From talking to the IRS a 990N will not be accepted from any organization that has not filled out a 1024 or 1023. Let me know your thoughts on this. Thank you!
Nathalia B

 

Nathalia,

Yes, the IRS does want all nonprofit organizations to file a 990N, but many organizations do not have to file the Form 1023/1024 if they have gross annual revenues under $5,000 (for a 501c3) or are a 501c7 Social Club who can “self declare” tax exempt status without filing a Form 1024.

To further confuse things, the IRS will not have an organization in their system until they file a Form 1023/1024.

An organization that is exempt from filing the Form 1023/1024 (for the two reasons listed above) can call the IRS and be added to the IRS database so they can file the 990N.

You can 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 to be added to the IRS database.

Lately, I have helped several homeschool organizations that did not file their 990Ns and are now applying for tax exempt status. They now have to file corporate income tax returns for the years they were not filing the Form 990Ns! It is more paperwork and holding up their tax exempt status.

I hope that helps clarify things a bit!

Carol Topp,CPA

Self-proclaimed tax exempt status for 501c7 Social Clubs

Photo credit: Money.cnn.com

Carol,

I thought our homeschool organization had reached a conclusion on this issue and self-proclaimed 501(c)(7) status as you recommended. However, we have a new treasurer who wants documentation. I have searched the internet and cannot find anyone else talking about “self-proclaimed” status for 501c7 Social Clubs. I have read Pub 557 and the 1024 instructions and do not find an exception to the filing requirement. Can you point me to your source for this info?

Thanks, Cynthia

Cynthia,
I could not find any information on “self proclaiming” 501c7 status on the IRS website either. I attended an on-line webinar on February 24, 2011 hosted by the IRS called “Starting Off Right: What New Non-501c (3) Organizations Need to Know.”

I asked a question, “I’ve heard that organizations such as the ones you are discussing today – 501(c) 4s, 5s, 6s, 7s, 8s, and 10s – are not actually required to complete and submit Form 1024, Application for Recognition of Exemption Under Section 501(a). In other words, an organization that believes it qualifies for exemption under one of these subsections can simply say it does and start to operate. Is that true?”

The IRS’s reply was :

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.

Here’s a link to the IRS video and transcript from the webinar. The question I asked and the IRS’s reply can be found on page 39
http://www.irsvideos.gov/StartingOffRightNON501c3/

I hope that helps!

Carol Topp, CPA

 

 

Can a homeschool group self-declare 501c7 Social Club status?

I am the new treasurer of a homeschool group in TX. We have about 100 members (dues are $30).  Last year our board reviewed our status with reference to your website and decided 501c(7) fit us best.

You say that you can self declare 501c(7) status.  On the IRS website I found an application(form 1024) and I could find no reference to self declaration.

Can you point me to some documentation that shows we are allowed to self declare?  I am just trying to make sure everything is in order.

Roy in TX

 

Roy,
I could not find any information on “self proclaiming” 501c7 status on the IRS website either. I attended an on-line webinar on February 24, 2011 hosted by the IRS called “Starting Off Right: What New Non-501c (3) Organizations Need to Know.”

I asked a question, “I’ve heard that organizations such as the ones you are discussing today – 501(c) 4s, 5s, 6s, 7s, 8s, and 10s – are not actually required to complete and submit Form 1024, Application for Recognition of Exemption Under Section 501(a). In other words, an organization that believes it qualifies for exemption under one of these subsections can simply say it does and start to operate. Is that true?”

The IRS’s reply was :

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.

 

You can view the slides from the webinar here:
http://www.irsvideos.gov/StartingOffRightNON501c3/player/frame-wm.htm

I hope that helps!

 

Carol Topp

Can we “self proclaim” tax exempt status?

Carol,
I’m pretty sure that we meet all of the requirements to be a 501c 7 social club—your website talks about the ability to “self proclaim” their tax exempt status and the fact that a tax return is not necessarily required—I’ve searched the IRS website but cannot find that mentioned.

-Bill in FL

 

Bill,

I found two sources where the IRS explains that 501(c)(7) social clubs do not have to file an application to be considered tax exempt:

1. From the IRS manual Section 7.25.1.1 http://www.irs.gov/irm/part7/irm_07-025-001.html (Accessed 8/20/2012. Emphasis added)

IRS Manual 7.25.1.1  (11-01-2003) Overview

The Service will recognize qualified organizations as exempt from federal income tax in response to requests submitted by the organizations. Except for most organizations described in paragraphs (3), (9), or (17) of section 501(c), the Internal Revenue Code does not require organizations to apply for recognition of exemption. An organization qualifies for exemption if it meets the requirements of the Code. However, an organization is subject to tax until it establishes that it qualifies for exemption, and most organizations find that filing an application for recognition of exemption is the least burdensome way to establish that they qualify.

2. The IRS hosted a webinar titled: Starting off right- what new non 501(c)(3) organizations need to know. You can view it here: http://www.irsvideos.gov/StartingOffRightNON501c3/

In the transcript of the webinar (page 39) they addressed a question I had emailed:

“I’ve heard that organizations such as the ones you are discussing today – 501(c) 4s, 5s, 6s, 7s, 8s, and 10s – are not actually required to complete and submit Form 1024, Application for Recognition of Exemption Under Section 501(a). In other words, an organization that believes it qualifies for exemption under one of these subsections can simply say it does and start to operate. Is that true?”

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.

Source:http://www.irsvideos.gov/StartingOffRightNON501c3/files/Powerpoint_Slide_Presentation_with_Transcript.pdf (page 39) accessed August 20, 2012

I hope that helps!

Carol Topp, CPA

We’re not 501c3 and don’t want to be!

IRS 1040 Forms Post Office April 14, 20113
Creative Commons License photo credit: stevendepolo

Our support group has been in existence over 20 years… and we are  STILL  not a 501(c)(3) …. and don’t want to be!

It would take so much more work, money, etc. to be a 501(c)(3)!!

Many times it is hard for our members to understand this — they think any group who’s not set up as a ‘business’ to ‘make money’ has to be a 501(c)(3).  Our group does NOT take donations — membership fees cover our cost of doing business. And they are reasonable — $10 a year, to get our newsletter via email, $20 if you want it printed and mailed to you.  We put out a group directory each year, pay for some things like church rental for our Back to School meeting, copies of membership forms & information about homeschooling that we distribute, etc.

Karleen
Conroe, TX

Karleen,

I need to warn you in your some of your assumptions. I’m a CPA and work with homeschool organizations to organize properly and decrease their tax liabilities by obtaining tax exempt status with the IRS.

I answered a leader who asked, “Can’t we operate without IRS tax exemption?” in this blog post.

You wrote: “they think any group who’s not set up as a ‘business’ to ‘make money’ has to be a501(c)(3).” They are partially correct. If your organization makes a profit, it owes tax unless it is legally tax exempt.

If your group is a nonprofit (i.e. no profit motive) you have one of 4 legal choices:

1. Stay small and remain under the IRS threshold of $5,000 in annual gross revenues for filing for 501c3 status.The IRS allow small nonprofits to “self declare” their tax exempt status without filing an application. But even small nonprofits must file an annual report with the IRS, Form 990N.

2. Consider another tax exempt status such as 501(c)(7) Social Club if you are a support group. See my blog posts on that issue here. And, like #1, 501(c)(7) social clubs are still required to file an annual report Form 990/990EZ or 990N with the IRS.

3. File for tax exemption under 501(c)(3) as an educational organization. This just got easier with the new IRS Form 1023-EZ.

4. Or you can pay your taxes.  When paying taxes is the alternative, tax exempt status doesn’t look so bad, huh?

Just because you do not accept donations does not exempt you from the IRS and tax regulations.

The USA offers a wonderful opportunity for nonprofit groups to keep all of their surplus and avoid paying taxes on it. But it does mean filing one time a document (Form 1023 or 1024) with the IRS to become a tax exempt organization.

I hope that clears things up a bit.

 

Carol Topp, CPA
HomeschoolCPA.com

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

Save

Are Homeschool Support Groups Automatically Tax Exempt?

women_group_Feet

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