Can my family’s homeschool be a nonprofit?

I see several articles (on your website www.HomeschoolCPA.com) on setting up as a not-for-profit for homeschool organizations (e.g. homeschool co-ops), but I wonder if I could set my own family’s homeschool up as a non-profit. We’re in Texas, so we are considered a private school.
-Lauren in TX

Lauren,
You asked a good question and I’ve been asked it before in different ways. Nonprofit organizations have a lot of benefits including tax free income, discounts, and sometimes pay no sales tax!
I’m not a lawyer, nor familiar with Texas private school laws, but I’ll try to explain how I see things.

Briefly, a nonprofit organization exists to serve a group, not an individual. The IRS will not grant “recognized charity” 501(c)(3) tax exempt status to a group that is formed solely to benefit the founder’s family. A tax exempt organization must serve a public good.

The IRS forbids private “inurement” in 501(c)(3) tax exempt organizations. Inurement means to be beneficial or advantageous. Inurement occurs when an organization is formed or operates with an incorrect charitable purpose that allows individuals in control to profit from the organization. 501(c)(3) organizations can lose their tax exempt status for practicing inurement.

Inurement/Private Benefit – Charitable Organizations

A section 501(c)(3) organization must not be organized or operated for the benefit of private interests, such as the creator or the creator’s family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization.
From the IRS website at https://www.irs.gov/charities-non-profits/charitable-organizations/inurement-private-benefit-charitable-organizations

So, in short the answer is no, your family homeschool cannot be set up as a nonprofit organization, even if your state classifies a homeschool as a private school. That’s how I see it.

Carol Topp, CPA

Now, here are my “lawyer words…”
Any tax advice contained in this communication was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

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?

handswithcash

Tax season has officially launched, so it’s time to 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?

Sorry, but the federal government does not give a tax credits for homeschool expenses

State tax credits or deductions for homeschool expenses

But, 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

Homeschool business or nonprofit as a tax dodge?

Some homeschoolers think they can start a business or a nonprofit organization of their homeschool activities and then deduct their expenses.  It doesn’t work that way. See my blog post  “Can you set up homeschooling as a business?”

Ann Zeise of A to Z Home’s Cool addresses these ideas:

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

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Insurance provider works with homeschool groups

Angela, a homeschool leaders in Arkansas, shared some helpful information about insurance for homeschool groups.

 

As our group grew and I began to understand the potential liability we, especially our leadership, was taking on and heard of more and more groups being sued, our board of directors decided it was imperative that we be insured.
Our search for insurance was very long, and discouraging.  We solicited quotes from companies and were completely turned down, or quoted prices that would have ruined our budget.   Then we found AIM!

Unfortunately, AIM Insurance no longer covers homeschool organizations.

 

Some homeschool leaders in Indiana and Ohio found that Mennonite Mutual Insurance is covering homeschool organizations.
 

And NCG Homeschool Solutions offers insurance to homeschool groups ad Classical Conversations Communities

 

Carol Topp, CPA

Should your homeschool group be an LLC?

TaxQuestions
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?

IRS 1040 Forms Post Office April 14, 20112
Creative Commons License 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.
https://www.irs.gov/charities-non-profits/tax-law-compliance-before-exempt-status-is-recognized

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 $50,000. 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:

1. They had all their paid teachers sign a Independent Contractor Agreement.
2. They did not control the content of the class, nor dictate to the teacher what curriculum she must use.
3. They offered no benefits to teachers.
4. They did not train their teachers.

But these are only a few of the factors to address in making a worker determination.

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 an RS brochure regarding employee or independent contractor status (IRS Pub 1779).

 

My new book Paying Workers in a Homeschool Organization explains in detail how to determine of your worker is an employee or an Independent Contractor.

You may want to have a private consultation to discuss your unique situation. I offer a Worker Classification Determination consultation to put your mind at ease.

Carol Topp, CPA


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Paying Workers in a Homeschool Organization-2nd edition

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

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New article on homeschool support groups and the IRS

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Creative Commons License 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

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