Will getting an EIN put us on the IRS radar?

Usually the first contact a homeschool organization has with the IRS is getting an Employer Identification Number (EIN). Most banks now request an EIN when a group opens a checking account. One group in Virginia is doing things right by getting a checking account for their homeschool co-op instead of using a personal account, but they wonder if this will mean more contact with the IRS.

Hi Carol,

I am new to an existing homeschool co-op in VA. Tomorrow morning we are meeting to discuss our options as it relates to becoming a more formal organization. I want to be able to advise them as to their options on this.

This co-op is more then 12-15 years old, we do not accept donations or need to, so far we have been handling the money through someone’s personal bank account, we receive fees from students and then pay teachers and reimburse them for materials, generally we break even each year (or can if we need to), there are regular Board meetings, I do not know if they have bylaws or take minutes but I do know they have a mission statement. The bottom line is that we want to be able to have a business checking account.

Can we get an EIN in order to open a checking account in our co-op name without incorporating and without having a state or federal annual filing requirement? I seem to remember that once you get an EIN (that I think is required for a business bank account), you are on the radar screen with the IRS and will need to file some sort of return.

Thanks so much

Nancy in VA

Nancy,

Yes, you can get an EIN for banking purposes, but not have any other dealings with your state or the IRS. Many homeschool groups operate for years with no contact from their state or the IRS.
You will deal with the IRS if you become a 501(c)(3) tax exempt organization or pay workers.

BTW, I will caution you that if you are paying teachers, then you do have some reporting to the IRS and your state government. You will have to pay payroll tax (Social Security and Medicare) and file a W-2 if they are employees or file a 1099MISC if they are independent contractors. You should read this blog entry: Paying co-op teachers is a sticky issue

Best of success to you!

Carol Topp, CPA

Can a homeschool be tax exempt and obtain grants?

Dear Carol:
I am interested in writing proposals for grants for my family’s home school. As an individual home school, not as a home school support group, I want to apply to receive small amounts of money for travel, museum entry, art gallery entry, books, posters, etc. More often than not, I find this statement :

“All applicant organizations or sponsoring agencies must be exempt from federal taxation under the Internal Revenue Code Section 501, in order to be eligible for funding.”

What do I have to do to have our home school be exempt from federal taxation?

Thanks.

Nancy H., Mississippi

Nancy,

You asked an excellent question. You are correct that many fund raising organizations now require 501c3 tax exempt status. Some homeschool groups want to become 501c3 tax exempt organization just so that they can participate in some fund raisers. I have a homeschool co-op as a client right now applying for 501c3 status.

A private individual or family cannot be a 501c3 tax exempt organization. The reason is that the IRS does not allow tax exempt organizations to offer private benefits or what they call “inurement” (meaning to become beneficial or advantageous) to individuals. Tax exempt organizations must benefit a group, preferably the general public.

I have been asked your question before so I wrote about it on my blog. Here’s the link: Can my family’s homeschool be a nonprofit?

You might also read my blog entry on doing a family fund raiser: Can my individual homeschool have a fundraiser?

I hope that helps!

Carol Topp, CPA

Any Tax Breaks for Homeschoolers?

Since tax season 2012 has officially launched, I’ll address a question I am frequently asked,

Do homeschoolers get any tax breaks for their homeschooling expenses? Can a homeschool family deduct any of their homeschool expenses?

The simple answer is “No; there are no tax credits for homeschool expenses from the federal government.”

The longer answer is “Maybe, depending on what state you live in.”

Several states have an educational tax credit. Iowa, Arizona, Minnesota and Illinois all have some sort of  tax break for individuals. The credit is available to any public or private school student, so it is not unique to homeschoolers. Florida and Pennsylvania offer businesses tax credits if they sponsor a scholarship.

This document has a chart of education tax credits and deductions by state (updated November 2008). Scroll to page 6 to see the chart.

http://www.house.leg.state.mn.us/hrd/pubs/feelaw.pdf

Home School Legal Defense Association has an explanation of some states’ tax breaks or credits:

http://www.hslda.org/docs/nche/000010/200504150.asp

Homeschoolers can get creative and think perhaps they can start a business or a nonprofit organization of their homeschool activities and then deduct their expenses.  Ann Zeise of A to Z Home’s Cool addresses these ideas:

http://homeschooling.gomilpitas.com/articles/031401.htm

You cannot contribute to your own child’s K12 education and get any tax deduction for it, no more than if you sent him to a private school and tried to write off the tuition.

Carol Topp, CPA

“Digital image content © 1997-2007 Hemera Technologies Inc., a wholly owned subsidiary of Jupiter Images Corporation. All Rights Reserved”.

Insurance provider works with homeschool groups

 

 

 

 

 

 

Thanks Angela for sharing this helpful information!

Carol Topp, CPA

Should your homeschool group be an LLC?

Limited Liability Company (or LLC) is a relatively new type of business structure. Several homeschool leaders have been asking if its something their homeschool group should consider.

In particular, many homeschool groups wonder if they should file for LLC status as part of becoming a 501(c)(3) tax exempt organization.

Caution:  I am not an attorney, nor am I offering legal advice.  I will relay what I have leaned about LLC’s filing for 501c3 tax exemption from the IRS, but I am not offering a legal opinion. I recommend that you seek legal counsel if you pursue either option.

Only recently has the IRS granted 501c3 tax exempt status to LLCs. LLCs are a relatively new business structure (only available in all 50 states in the mid 1980′s) and the IRS is slow to accept changes. In a document titled “Limited Liability Companies as Exempt Organizations-Update” (2001 Exempt Organization CPE Text. Available at http://www.irs.gov/pub/irs-tege/eotopicb01.pdf ) the IRS outlined 12 conditions that an LLC must satisfy to qualify for exemption under IRC (Internal Revenue Code) 501c3.

These conditions are legally complex and I would strongly recommend that you seek experienced legal counsel before organizing a nonprofit LLC.

I read an article titled “Nonprofit LLCs: Time for a New Experiment” (http://www.mayer-riser.com/Articles/nonprofit/npllc.htm) and the author, a nonprofit attorney, advises:

Until state legislatures address the unresolved issues, the actual use of the LLC form by nonprofit organizations should be undertaken only after careful review of current law in the applicable jurisdictions, and only with the assistance of qualified counsel with experience in drafting complex and detailed operating agreements and experience in the law of tax-exempt organizations.

Unfortunately, at the time of the article in 2002, only 11 organizations had obtained 501c3 status as LLCs, so experienced assistance may be difficult to find.

The reason that most businesses use the LLC structure is for limited liability. I organized my own sole proprietorship accounting practice as an LLC  because I wanted limited liability and protection of my personal assets. For a nonprofit organization, such as most homeschool groups, nonprofit corporation status in your state brings similar protections of limited liability. If your main reason for seeking LLC structure is for limited liability, nonprofit incorporation in your state is the easier option.

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 or pursue Limited Liability Company status.

What tax forms do I file for a homeschool co-op?

photo credit: stevendepolo

Carol’s book has been so helpful in getting our co-op organized. We have determined we are going to file Articles with our state and create by-laws and set ourselves up for a non profit corporation. With our fundraising and dues, we never bring in more than  $5,000. We probably have around 50-60 families returning this year. We are 100% volunteer based for our fundraising (silent auctions, garage sale.)
Come tax time, do we file with the IRS (like I do for our household every year?) For example, do we use turbo tax and file for our co-op? And if we have let’s say, $1,000 left at the end of the year, is that taxable? We do not want to zero out our account as it is nice to have a cushion for various reasons.

Lisa

Lisa,

Good questions!

Q: Come tax time, do we  file with the IRS (like I do for our household every year?) For example, do we  use turbo tax and file for our co-op?

A: Nope. This is a nonprofit organization, not part of your family/individual income, and not a for-profit business, either. Don’t use TurboTax. Please! (we tax preparers are not crazy about TT in general)

Technically, you would file a corporate tax return (Form 1120), but I would not recommend doing that.

Since your group qualifies as an automatic 501(c)(3) tax exempt organization (under $5,000 gross annual income), you could file a Form 990N. It’s an online form of only 5 questions. You may have to call and register with the IRS first, since you are not in their database. But many small nonprofits do not file the Form 990N at all.

(If you make more than $5,000 gross annual income, you must apply for tax exempt status and then will file the Form 990N or the Form 990EZ or the full 990 depending on the gross income of your organization. If your nonprofit has gross income of $50,000 or less, you file the Form 990N. That covers 99% of all homeschool organizations.  So the paperwork is quite small and easy to deal with.)

The IRS expects nonprofit corporations to file for tax exempt status with in 27 months of formation (the date of your nonprofit incorporation status from your state). So you have about 2 years to run your program before you have to file for tax exempt status. In the meantime, you can file Form 990N each year.

Q: And if we have let’s say, $1,000 left at the end of the year, is that taxable?
A: Taxable, unless you qualify for tax exempt status (either automatically or by application).
Q:We do not want to zero out our account as it is nice to have a cushion for various reasons.
A: Yes, that the reason why groups want tax exempt status. To reserve their surplus for future use. It’s a wonderful blessing in the USA that our gov’t allows charitable, religious and educational organizations to exist tax free. Not every country allows that!

Hope that helps!

Carol Topp, CPA

P.S. I’m glad my books were helpful. I have just updated my book on  501(c)(3) tax exempt status for homeschool groups. It’s called  The IRS and Your Homeschool Organization and covers all this information in greater detail. Read about it here.

Does a nonprofit need to file any tax returns before they apply for tax exempt status?

I was advising a small homeschool organization about applying for tax exempt status and explained that they had 27 months after their date of formation to file an application with the IRS.

Hi Carol,

I just read this and was concerned that I would need to file something during the 27 months time frame.  Please explain if possible.
http://www.irs.gov/charities/article/0,,id=156389,00.html

Teri

Teri,

The link to the IRS website concerns IRS requirements before you apply for tax exempt status. The link above states this (in part)

Tax Law Compliance Before Exempt Status Is Recognized

An organization that claims tax-exempt status under section 501(a), but has not yet received an IRS letter recognizing exempt status, is generally required to file an annual exempt organization return.

This is a fairly new requirement from the IRS. I used to tell nonprofit organizations that if they had not yet applied for 501c3 status, they did not have to file the Form 990. It came to my attention only a week ago that the IRS wants Form 990 from all nonprofits.

Fortunately, the form your organization (and all small nonprofits with annual gross revenues of less than $50,000) would need to file is the 990N, an electronic postcard that asks about 5 questions: Name and address of organization, the principle officer’s name and check a box that your annual gross revenues are under $25,000. It is very short and would take less than 5 minutes once a year.

Here’s a blog post that answers your question. http://homeschoolcpa.com/does-new-irs-990n-apply/

I hope that helps.

Carol Topp, CPA

Is your homeschool co-op’s hired teacher really an employee?

A homeschool nonprofit I work with called me quite frantic.  They had received a letter form the IRS.  It seems that a former teacher of one of their classes  was asking for an examination of her status as an independent contractor (using IRS Form SS-8).  She thought that she should be classified as an employee of this homeschool nonprofit.  If the IRS agrees with this worker, the homeschool organization may have to pay back taxes (Social Security and Medicare) and perhaps penalties.

Fortunately this homeschool group did many things right:

How about your homeschool group?  Would you pass an IRS examination?

Do your hired teachers sign an Independent Contractor agreement?

Do you avoid controlling their work as you might an employee?

Here’s a helpful IRS brochure regarding employee or independent contractor status (IRS Pub 1779).

I’ve written about paying teachers in a homeschool co-op setting:

Paying teachers in a homeschool co-op

W-2 and tax filings for teachers

Finally, my ebook Paying Workers in a Homeschool Organization is also helpful with examples of the forms your need to file.

Carol Topp, CPA

New article on homeschool support groups and the IRS

photo credit: Keith Williamson

I just uploaded a new article onto my Leader Tools/Articles page

Are support groups automatically tax exempt?

It discusses the difference between homeschool co-ops and support groups in the eyes of the IRS and the benefits of being a support group!

Here’s what one homeschool leader said when I shared this article:

The path I believe we will go down is to become a  Non Profit Corporation and then (be a) 501(c)7.  You provide a great and much needed service to homeschooler support groups and co-ops.  I wish our previous board knew about you and your web site.  I certainly will be spreading the word.

Thanks again.  I hope I get to meet you in person some day.

Jeff

If you haven’t read the articles on my Leader Tools page in a while, why not print some out and share them with your board?

Helping you lead your homeschool group,

Carol Topp, CPA

Audits: should your group be doing them?

Hi Carol,

I am looking on your HomeschoolCPA web site for a list of services that you provide.  Our homeschool group is wondering if you offered a service for auditing our books each year to make sure everything is in order?

Debi K

Debi,
Here’s the link to my services: http://homeschoolcpa.com/services/

I can offer to look over your record keeping system and offer recommendations, but I cannot (and will not) do a full audit.

The word audit has  a specific meaning in accounting and it involves an in-depth look at your entire accounting operation. It is very time consuming and expensive ($3,000 and up). I don’t do audits because they require  a staff of people to perform and require a review of my accounting practice by other CPAs, which would cost me at least $1,000.

Instead,  I can offer my consulting services and discuss your records and system of handling your money and make recommendations. That would help your organization quite a bit, but not be a full audit. I’ve done that type of work for homeschool groups before.

Carol Topp, CPA

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