Self-declared tax exempt status for 501c3 homeschool groups

We are just starting up our group and we do not want to do anything illegal, but we would not qualify as a nonprofit right now, so as per your IRS book, we would be labeled an Unincorporated Association. My question is… Do we need to do anything legally to continue as a group. We do plan to open a checking account and have an EIN number.
I just felt that for a group that is just starting and is not a nonprofit or at the 501 (c) (3) status yet, we don’t know the first steps to get a group of and running and if we need to do anything legally to start. Thank you so much for your time!
-EC

 

Dear EC,

Please watch this video 3 times (yes, 3 times!):

 

You will hear that to legally and correctly set up a nonprofit you need 3 things:

  1. A mission that is not motivated by profit
  2. A board
  3. Organizing documents. Usually bylaws but Articles of Association are also recommended. Get samples here

If you have those three things, your organization is a nonprofit. Congratulations! It may not be a nonprofit corporation; instead it is an unincorporated association, as you mentioned, but it is still a nonprofit.

But, there is a difference between nonprofit status and tax exempt status

Nonprofit status is granted by your state while tax exempt status is granted by the IRS to qualifying nonprofit organizations. Typically nonprofits need to formally apply for tax exempt status with the IRS.

But small nonprofits can self declare  501(c)(3) tax exempt status if your annual gross revenues* are $5,000 or less.

*Annual gross revenues are all the money you take in in a year, even if it just goes right back out. It’s not what is left over at the end of the year. It is not the amount in your checkbook. It is annual (yearly) gross (all) revenues (intake).

This video may be helpful: https://www.youtube.com/watch?v=DCFjnnY7mEw

 

How to self declare 501c3 tax exempt status

Since you have not officially applied on paper for 501(c)(3) status  (you self-declared 501(c)(3) status and don’t have to file the paperwork), your nonprofit organization is 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 990-Ns.

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

Say something like this,

“We’re a brand new 501(c)(3) educational organization and I needed to get added to the IRS exempt organization database so we can start filing our 990-Ns.”


**Note that only 501(c)(3) organizations with less than $5,000 annual gross revenues can “self-declare” their tax exempt status. Organizations with more than $5,000/year in revenues must apply for 501(c)(3) status using Form 1023 or the new, shorter Form 1023-EZ.


The IRS employee 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 homeschool 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. So create bylaws or Articles of Association/Articles of Incorporation before you call the IRS. Get the board to approve and sign them. Sample bylaws and Articles of Association can be found here.

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.

 

How to keep your 501(c)(3) tax exempt status

Be sure you go online (IRS.gov/990n) 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. If you operate on a calendar year, the 990-N is due May 15.

 

Carol Topp, CPA

Helping homeschool leaders with legal and tax compliance

 

How to Self Declare Tax Exempt Status

Your homeschool group can have tax exempt status without applying with the IRS.

Want to know how?

In this short podcast, Carol Topp, CPA, the HomeschoolCPA, tells you how to self declare tax exempt status, keep all of your surplus for your group and not pay the IRS.

Listen to the podcast (15 minutes)

 

FEATURED PRODUCT from HomeschoolCPA:

The IRS and Your Homeschool Organization

Does your homeschool group need to pay taxes?  Could they avoid paying taxes by being a 501c3 tax exempt organization? Do you know the pros and cons of 501c3 status? Do you know what 501c3 status could mean for your homeschool group?  I have the answers for you in my book The IRS and Your Homeschool Organization. The information I share in my book has been helpful to homeschool support groups, co-ops, music and sports groups and will help you understand:

  • The benefits of 501c3 status
  • The disadvantages too!
  • What it takes to make the IRS happy
  • What your state requires
  • Why your organization should consider becoming a nonprofit corporation
  • What is the difference between nonprofit incorporation and tax exemption
  • IRS requirements after you are tax exempt

Click Here to request more information!

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IRS amnestry program for employers (how to avoid penalties for paying workers as Independent Contractors)

You may have heard about the IRS crackdown on misclassifying workers and the penalties that your business or homeschool program could face if  your business is audited by the Internal Revenue Service (IRS). For a true but sad story about the Landry Academy read this.

What can you do to avoid the IRS penalties?

The IRs has a program called the Voluntary Classification Settlement program (VCSP) .

Eva Rosenberg, the Tax Mama, explains the IRS Voluntary Classification Settlement Program in plain, clear English. Just the way your mama would talk to you.

The VCSP (aka the IRS amnesty program) allows employers to avoid the penalties for paying your workers as Independent Contractors when they should have been paid as employees.

IRS Amnesty Program? Yes There IS an Employer Amnesty Program

Eva explains,

For those employers who do apply for the VCSP, the savings can be substantial. For example, take a calculation based on unreported payroll of $625,000 in the prior year. Under the amnesty, the full payment to the IRS would be under $6,600. Without the amnesty, with the IRS looking back for only three years, it would cost the employer over $292,000 (for six years, over $620,000).

I can help you determine if the IRS amnesty program is a good option for your homeschool business or nonprofit organization. Contact me and we can talk about your options.

One homeschool group leader decided to apply for the IRS amnesty program and convert her tutors to employees. She said, “For $145 (her fee to the IRS), I can sleep better at night knowing the IRS won’t audit me or make me pay a penalty.”

Carol Topp, CPA

Helping homeschool leaders

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IRS tries to decrease errors in automatic revocations for tax exempt organizations

IRS-Building1

Every year the exempt organization (EO) branch of the IRS send out a Work Plan for the upcoming year and reviews what it accomplished in the past year.

IRS Exempt Organization 2017 Work Plan (24 pages)

Here’s something interesting I found:

In FY 2016, EO Determinations focused on its objectives to improve processing of applications and enhance customer satisfaction. We implemented several programs to accomplish these goals.
Erroneous Revocation Prevention: On May 3, 2016, EO Rulings and Agreements formalized procedures to identify and prevent erroneous automatic revocation before the organizations are notified and before the revocations are posted to EO Select Check. Preventing these erroneous revocations eliminates adverse impact to organizations and removes the burden from organizations to identify and notify the IRS of the error. Since March 2015, we have reviewed 13,933 potential auto-revocations and prevented 3,202 erroneous revocations (through June 2016).

In plain English, thousands of nonprofits found their tax exempt status was revoked automatically before the organizations were told (!) and before the revocations were posted to EO Select Check (that’s the IRS online database of tax exempt organizations).

Over 3,000 revocations that were an error! What a mess!

The IRS didn’t get specific about why these organizations had their tax exemption revoked or how they fixed the problem, but I have some ideas:

1. It takes 6-8 weeks (yes, that’s WEEKS, not DAYS) for the IRS to update their exempt organization database so that small organizations can file their annual Form 990-N Information Return. If the organization is granted tax exempt status close to their due date for filing the 990-N, they may be unable to timely file a 990-N because the  IRS takes 6-8 weeks  to update their exempt organization database!

This happened to one of my small nonprofit clients. They had failed to file their 990-N for two years (they didn’t know about the requirement) and the deadline for the third year was quickly approaching. Failure to file your 990/990-EZ/990-N for three consecutive years means automatic revocation of tax exempt status. We were sweating bullets that they could file the 990-N on time. The board president was checking the IRS database daily as the deadline drew nearer. She managed to file the 990-N just days before the deadline! Whew!

If the IRS database of Exempt Organizations were updated in a more timely manner, then there could be fewer erroneous automatic revocations.

 

2. Another small nonprofit told me that they received an automatic revocation letter, but had never received a “You’re late in filing the Form 990-N” type of letter or a warning! This nonprofit had not changed their address, either.

So another thing the IRS could do to reduce erroneous automatic revocation is to mail organizations a reminder and a warning letter for failure to file a 990/990-EZ or 990-N.

I hope my suggestions are what the IRS has put in place.

Carol Topp, CPA

 

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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

 

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How can I thank my volunteers?

 

It’s the end of your homeschool organization’s school year and you want to thank your volunteers. They work so hard, so you hand out generous gift cards as thank you gifts. You may have just created a tax liability for your volunteers! Carol Topp, CPA, the Homeschool CPA discusses ways to thank your volunteers that are tax-free.

Listen to the podcast

 

Do you have more questions about volunteers and paying workers? I spent at lot of time doing research so that homeschool leaders will know if they are paying their volunteers, board members, and workers legally and correctly. It’s all in this new book:

payingworkerscoveroutlined

Paying Workers in a Homeschool Organization-2nd edition

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

BuyPaperbackButton

 

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Understanding Taxes for a small homeschool business

It’s tax season and I’ve been getting several emails from homeschool business owners, especially Classical Conversations directors, about how to fill out their tax returns.

The IRS has a terrific website called Understanding Taxes that explains how to fill out a simple business tax return.

It’s quite good. I’ve used their simulations when I taught personal finance at my homeschool co-op

Visit these websites to learn how to fill out your Schedule C Business Income and Loss.

Understanding Taxes home page

Simulation of filing a simple business tax return using Schedule C-EZ

Simulation of filing a simple business tax return with a 1099-MISC (this simulation would be helpful for a Classical Conversation tutor who receives a 1099-MISC).

 

You could also try searching Youtube for helpful videos on preparing a business tax return. Here’s one I found:
How to Fill Out Schedule C for Business Taxes He goes over the Schedule C line by line in about 20 minutes.

 

I hope that helps,

Carol Topp, CPA

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Can my landlord get a tax deduction for the free rent he gives us?

I have a few questions for you about a tax deduction for our “landlord.” We just received 501(c)(3) tax exempt status form the IRS. Does this mean that our landlord can claim a deduction the reduced rent she gave us?  RW

 

Dear RW,

Donations of cash or physical goods to your organization are tax deductible charitable donations.  But donations of services or use of leased property is not a tax deduction.

If your landlord gave your homeschool organization free or reduced rent, that is not a tax deductible donation for the landlord. Sorry.

Here are some articles that explain the IRS rules on donating leased space.
Can landlords take a tax-deduction for the donation of leased space?

When a property owner transfers title to a charity of all or part of real property, the owner can generally take a tax deduction for the gift.  However, offering a charity leased space for free or at a reduced rate is a not a gift of an ownership interest and is not considered deductible by the IRS.

Landlords do a good deed by donating leased space to a charity but they are not permitted to receive a tax benefit for their action.

Tax treatment of the provision of rent free

For this reason, donations of services or loans of property to a charity do not qualify as gifts because they do not transfer a property interest to the charity. They simply allow the charity to use the property of the donor, or to benefit from the donor’s services, free of charge.

Here’s the official word from the IRS from Revenue Ruling 70-477.

“a contribution, made after July 31, 1969, to a charitable organization of the right to use property is treated as a contribution of less than the entire interest in the property and does not give rise to a deduction.”

In other words, if someone donates a building (i.e. “the entire interest in the property” ) to a charity, it is a tax deductible donation. But if the contribution is the right to use the property, then there is no tax deductible donation.

Carol Topp, CPA

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What Homeschool Leaders Don’t Know About Losing Tax Exempt Status

What Homeschool Leaders Don’t Know About Losing Tax Exempt Status

Carol Topp, CPA, the HomeschoolCPA will share tips on important issues that homeschool leaders may not know about. This episode will focus on helping homeschool leaders know what to do if their organization has lost its tax exempt status.

Listen to the podcast

Does your homeschool group need to pay taxes?

Could they avoid paying taxes by being a 501c3 tax exempt organization? Do you know the pros and cons of 501c3 status? Do you know what 501c3 status could mean for your homeschool group?

I have the answers for you in my book The IRS and Your Homeschool Organization. The information I share in my book has been helpful to homeschool support groups, co-ops, music and sports groups and will help you understand:

  • The benefits of 501c3 status
  • The disadvantages too!
  • What it takes to make the IRS happy
  • What your state requires
  • Why your organization should consider becoming a nonprofit corporation
  • What is the difference between nonprofit incorporation and tax exemption
  • IRS requirements after you are tax exempt

Click Here to request more information!

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What Homeschool Leaders Don’t Know About IRS Annual Reports

 

What Homeschool Leaders Don’t Know About IRS Annual Reports

Carol Topp, CPA, the HomeschoolCPA will share tips on important issues that homeschool leaders may not know about the IRS Annual Reports. This episode will focus on helping homeschool leaders understand a report that the IRS requires from all tax exempt organizations–including your group! It’s called the Form 990.

Listen to the podcast

Carol Topp, CPA can help with:

Preparation of IRS Annual Return

Preparing the Form 990/990-EZ Annual Information Return for the IRS and your state. The Form 990/990-EZ is due 4 1/2 months after the end of your fiscal year.

This service involves several telephone calls and e-mails and copy of your financial statements (a QuickBooks file is preferred).

I also offer a service I call “Buying Peace of Mind”

This is a a review of IRS forms you have prepared yourself. You can save money by doing much of the work yourself. I will review Forms 1023 or Annual Form 990/990-EZ and offer my opinion and advice.

___________________________________________

Wow Carol!  Thanks so much – just the info you provided here is very helpful.  I look forward to speaking with you as I’m anxious to get started, but I want to do so in the best and most efficient way.  This is new territory for me – so I truly appreciate your guidance!

-Laine Discepoli, Glendale, OH

________________________________________

 

Click Here to request more information!

 

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