Small charity grows and gets audited by the IRS for it!

A fellow CPA told me the story of what happened to a small charity.

The small charity thought they were eligible to file the new, easy, short IRS Form 1023-EZ to apply for 501c3 status.

Organizations can use the shorter, cheaper, online Form 1023-EZ if their annual gross revenues are less than $50,000/year and expect to be less than $50,000 for the next 3 years.

So off went the Form 1023-EZ application and the charity was granted 501c3 tax exempt status!

Then they held a fundraiser (or several fundraisers) that were successful beyond their dreams and their total revenue was OVER $50,000 in their second and third year. They filed (correctly) their annual information returns, Form 990-EZ, to report all their income and expenses.

That’s when they got a letter from the IRS.

The IRS was auditing them because the IRS claimed the charity should have filed the longer, more expensive, full Form 1023 when they applied because their annual revenues were more than $50,000/year. And the IRS was right, in hindsight.

The IRS auditor asked for:

  • The full application to be completed (its 26 pages!) along with copies of
  • Bylaws
  • Articles of Incorporation
  • Financial statements for 5 years
  • A narrative explaining the activities of the organization
  • Minutes of meetings

That last requirement surprised me because the Form 1023 application doesn’t ask for minutes of meetings, but the IRS auditor did.

Fortunately this group had those minutes and with the help of their CPA, passed the audit!

Lessons learned:

  • Keep minutes of your meetings.
  • Have all your documents ready in case the IRS asks to see them.
  • If you are close to the $50,000 annual gross revenues threshold and think you could exceed it in your first 3 years, use the full length Form 1023 application form when applying for 501c3 tax exempt status.

 

 

Have more questions about the IRS, 501c3 tax exempt status, and your nonprofit?

Carol Topp’s book, The IRS and Your Homeschool Organization can help!

  • The benefits of 501(c)(3) 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

Order here.

 

Carol Topp, CPA

 

Nonprofit Incorporation for Your Homeschool Co-op

 

Should your homeschool co-op be a nonprofit corporation?

This podcast is an excerpt from a workshop titled Homeschool Co-ops: How to Start Them, Run Them and Not Burn Out.

In this short podcast episode (12 minutes) Carol Topp, CPA explains the benefits of forming your homeschool co-op as a nonprofit corporation and why a leader would want limited liability protection.

 

In the podcast Carol mentioned other podcast episodes in this series. Find them (#121-125) at HomeschoolCPA.com/Podcast

 

Featured resource

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!

Carol Topp, CPA

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Using QuickBooks Online for small nonprofits & churches

 

Here are some helpful books written by Lisa London, CPA from The Accountant Beside You, if you are using QuickBooks in your homeschool nonprofit organization.

Using QuickBooks Online for Small Nonprofits & Churches

is for users of QuickBooks Online. I recommend  QuickBooks online so that several people can log into the record keeping system including a bookkeeper, board members, the Treasurer and an outside accountant. i wish all my larger homeschool clients would use QuickBooks online.

http://accountantbesideyou.com/using-qbo-for-small-nonprofits-churches/

 

 

If you use the desktop version of QuickBooks, there’s a different book for you.

Using QuickBooks For Nonprofit Organizations, Associations & Clubs

http://accountantbesideyou.com/using-quickbooks-for-nonprofit-organizations-associations-clubs-paperback/

 

Lisa London, CPA from The Accountant Beside You, also offers classes on QuickBooks which some people prefer to reading books.

Carol Topp, CPA

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Paypal sent homeschool leader a 1099-K. Is it taxable income to her?

 

Our homeschool co-op leader set up a Paypal account to collect payments from our parents. She was very surprised when Paypal sent her a 1099-K for $40,000 with her name on it! Does she have to report this on her tax return even though it was for the co-op?

 

Oh dear. It appears that leader used her personal name and Social Security Number when setting up the Paypal account. She also used her name and SSN when setting up a checking account. This is not good!

This group was in the process of forming  as a nonprofit corporation in her state, getting an EIN for the corporation, and then applying for tax exempt status with the IRS. But the parents starting paying before all the paperwork was completed so the leader simply set up a personal Paypal account. It’s easy to set up a Paypal account (I have 3 Paypal accounts myself). But now she has a tax mess on her hands!

She should have filed as a nonprofit corporation, gotten an EIN and then set up the PayPal account in the name of the new nonprofit corporation with their new EIN. Then the 1099-K would have come to the homeschool group, not her personally.

But that’s water under the bridge.

In the eyes of Paypal and the IRS, the leader has started a business, collected money, and now needs to report that on her income tax return. Ugh!

She should file a Schedule C Business Income on her personal Form 1040 and report the Paypal income as Gross Receipts. At this point the leader should contact me or a local CPA for assistance in preparing her tax return. This is not the year for DIY! She does not want an IRS audit!

Additionally, she needs to set up this homeschool organization properly with nonprofit corporation, getting an EIN, and then applying for tax exempt status with the IRS, ASAP! I can help with that.

Download my list of steps to take to set up a nonprofit homeschool organization.

 

Please homeschool leaders, do not set up Paypal accounts, bank accounts or EINs in your personal name. Establish an organization and conduct business in the organization’s name only. Otherwise, you may face a complicated tax issue like this poor leaders.

Carol Topp, CPA

Classical Conversations community rejected by a church

Hi! I am a Classical Conversations Director in Illinois. Our church is asking us to leave as they believe hosting us threatens their tax exempt status. Other churches who have heard this claim do not want to accept us. Any advice? -Kimberly in IL

Kimberly,

I’m very sorry to hear about your problems with finding a church host.

The church is probably worried about their property tax exemption in Illinois since your Classical Conversations (CC) community is a business and not a religious or educational nonprofit.

Property tax exemption is different from federal income tax exemption granted by the IRS. The IRS grants churches automatic status as 501(c)(3) religious organizations. That’s not what is being threatened here.

Property tax exemptions are determined by the state and sometimes the county laws. That’s what has the church worried. If they lose property tax exemption, it will be very expensive for them to pay property tax.

I did a little digging and found some information about church property tax exemption in Illinois. Illinois may deny property tax exemption to the church if an organization using the church’s property has a “view to profit.” Illinois says that having a “view to profit” is incompatible with property tax exemption.

Unfortunately, as currently structured, your CC community has a “view to profit” and the church doesn’t want to offer your group space to meet and risk losing its property tax exemption.

The only advice I have is to ask the church if they would offer space with your CC community if it were a nonprofit organization with a religious and/or educational purpose. Illinois does grant property tax exemption to some educational organizations.

If you wish to re-form as a nonprofit organization, I can help you understand the pros and cons.

Carol Topp, CPA

HomeschoolCPA.com

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What Does It Take to be a Nonprofit?

 

It takes two things to be a nonprofit. Do you know what they are?

Which one are homeschool leaders doing well and which do they mess up most often?

HomeschoolCPA, Carol Topp, will explain what it takes to be a nonprofit in this short podcast episode (13 minutes).

In the podcast Carol mentioned that she offers consultations with your homeschool group leadership via phone or conference call.

To schedule a private phone consultation with Carol Topp, the Homeschool CPA visit: http://homeschoolcpa.com/services/consultation/

 

 

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The Difference Between Nonprofit and Tax Exempt Status

 

Do you know the difference between nonprofit and tax exempt status?

The difference can be confusing, so HomeschoolCPA, Carol Topp, explains the difference in plain  English and gives a real life example in this podcast episode.

 

 

Featured resource

The IRS and Your Homeschool Organization book.

The information in this book has been helpful to homeschool support groups, co-ops, music and sports groups to understand:

  • The benefits of 501c3 status
  • The disadvantages too!
  • What it takes to make the IRS happy
  • 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

Carol Topp, CPA

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How can a nonprofit board receive benefits (properly)?

A homeschool organization sent me their bylaws to look over. They had two conflicting statements about offering compensation or benefits to their board members, especially the officers (the officers of a nonprofit organization are President/Chair, VP, Secretary and Treasurer).

Article 4 Section 1 Board members shall receive no compensation (other than reasonable expenses) for their service on the Board.”

Article 5 Section 4 Officers of the Board are eligible for benefits such as discounts, retreats and/or priority registration as well as other meeting expenses deemed reasonable by majority vote.

So which is it? Are officers allowed compensation/benefits or not? Tuition discounts are taxable compensation according to the IRS (unless they are “insignificant“).

Also the benefits are approved by a “majority vote.” Majority of whom? The board? This organization has no voting members except the board. And a nonprofit board cannot vote themselves benefits because that is a conflict of interest and private benefit which is forbidden by the IRS (if excessive).

I understand the desire to thank hard-working board officers, but be careful that it doesn’t become taxable income or a conflict or interest or worse private inurement which is forbidden by the IRS for 501(c)(3) organizations.

Here’s what I recommend:
1. Change the wording of Article 5 Section 4 to read Officers of the Board are eligible for  benefits (such as insignificant discounts, training (retreats and conferences) and/or priority registration) deemed reasonable, but not significant enough to be taxable income, by majority vote of the non-officers of the board or recommended by an independent committee.

and then

2. Hold a board meeting where the officers leave the room and the remaining board members vote on what benefits the officers will receive that year. That means you need to have a large enough board to do this. And it needs to be done every year.

Or

appoint an independent committee (no one on the committee is related to any of the officers) to make a recommendation. The board votes to accept the committee’s recommendation (but without the officers allowed to vote since they will personally benefit).

These changes in their bylaws and having other board members vote for the officer benefits will keep the organization from having a #1) conflict of interest and #2) the appearance of private benefit. It also means the officers are being thanked for their service without receiving any taxable income.

 

If your organization needs help in understanding how to thank your board members (properly), read

or my new Homeschool Organization Board Manual. It’s a template for you to create your own board manuals as a place to store important papers and policies.

Carol Topp, CPA

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Is there a difference between a 501c3 and an association?

Carol,
Is there a difference between a 501c3 and an association?
T.W.

T.W.,
501(c)(3) is a tax exempt status granted by the IRS to qualified nonprofit organizations (most of them are nonprofit corporations) whose purposes include charity, religious, and educational (and a few other purposes).

The word “association” does not have a specific legal definition. Associations are a gathering of people for a cause. Associations are typically nonprofit organizations. They can be unincorporated or be formed as nonprofit corporations.

Some associations may qualify for 501(c)(3) tax exempt status, some may not. For example I am a member of the Ohio Society of CPAs. It is a business association for CPAs in Ohio. It has tax exempt status as a 501(c)(6) business league, but not 501(c)(3) status.

If you’re confused by the words, nonprofit, association, 501(c)(3), this short video may help clear things up:

 

I hope that helps,

Carol Topp, CPA

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Can our homeschool group get sued if we’re not a recognized nonprofit?

Carol,
We are a Christian homeschool group and co-op. The church that hosts our co-op classes is concerned with the possibility of us getting sued if we are not a recognized non-profit.  We are comprised of like-minded believers for a specific cause.  Can you comment on this?

TW

 

TW,

I usually recommend nonprofit incorporation to protect the leaders and members of a homeschool organization.

Nothing can stop a lawsuit, but forming as a corporation means the liability is limited to the corporation’s assets and it protects the personal assets of the leaders and members from the lawsuit damages.

Unfortunately, being like-minded does not mean you’re immune from lawsuits. One group told me that a co-op member’s health insurance sued the homeschool group for medical bills when a child was injured while at co-op. The co-op member did not bring the lawsuit, her health insurance company did.

If you need more information on the benefits of nonprofit incorporation for your homeschool group, read The IRS and Your Homeschool Organization. It includes a chapter on nonprofit incorporation.

I hope that helps,

Carol Topp, CPA

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