What? Homeschool support groups cannot be religious?!

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Carol,

Our homeschool support group has a statement of beliefs that every member must sign to be a member.

However, I was reading the 501c7 guidelines  for Social Clubs and learned that we cannot discriminate based on religion.

Does that mean in order to be tax exempt we cannot require a belief statement?
Blessings,
Lana in TX

Lana is referring to this IRS statement on Social Clubs. Most homeschool support groups fit the criteria to be tax exempt as a 501(c)(7) Social Club.

The club’s governing instrument may not contain a provision that provides for discrimination against any person on the basis of race, color, or religion.

 

Like many laws, you need to keep reading to see if there are exceptions to the general rule.
And there are some exceptions. The IRS guidelines state:

The statute does not require a club to have a certain percentage, or even any, of its members from different, racial or religious groups. So long as there are no written restrictions, a club does not violate the discrimination provisions. http://www.irs.gov/irm/part7/irm_07-025-007.html

 

But Lana’s group does have a written policy, a Statement of Faith, that every member needs to sign.

Does that mean homeschool support groups cannot have a Statement of Faith?

Read on…

IRC § 501(i)(2) provides an exception for a club which in good faith limits its membership to the members of a particular religion in order to further the teachings or principles of that religion, and not to exclude individuals of a particular race or color.

(i) Prohibition of discrimination by certain social clubs

Notwithstanding subsection (a), an organization which is described in subsection (c)(7) shall not be exempt from taxation under subsection (a) for any taxable year if, at any time during such taxable year, the charter, bylaws, or other governing instrument, of such organization or any written policy statement of such organization contains a provision which provides for discrimination against any person on the basis of race, color, or religion. The preceding sentence to the extent it relates to discrimination on the basis of religion shall not apply to—

(1)an auxiliary of a fraternal beneficiary society if such society—

(A)is described in subsection (c)(8) and exempt from tax under subsection (a), and
(B) limits its membership to the members of a particular religion, or
(2) a club which in good faith limits its membership to the members of a particular religion in order to further the teachings or principles of that religion, and not to exclude individuals of a particular race or color. ( my emphasis added)

 

So, Lana’s homeschool support group can have a statement of faith and discriminate on the basis of religion provided their purpose is to further the teachings and principles of their religion (and they don’t discriminate on the basis of race or color).

Carol Topp, CPA

How can the IRS revoke my tax exempt status when I never applied for it?

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Carol,
About 15 years ago a couple of moms started a homeschool summer sports group. About 8 years ago, two leaders opened a bank account. The bank set them up with a “Club” account and secured a federal ID number (EIN) for the club. We never applied to the IRS for anything. We never filed any annual reports (the Form 990-N).

Now from reading your website and our emails, it sounds like our tax exempt status was revoked and we need to get it back.

How can something we never had (501c7 Social Club status) be revoked? 

Your help in clarifying this is appreciated, so we know how to move forward.

Lisa

 

Lisa,

I know this is confusing.

Your sports group is a recreational club that fits the IRS definition of 501(c)(7) social club.

501(c)(7) Social Clubs can “self declare” their tax exempt status without officially applying. Technically, you “self-declared” your tax exempt status when you said you “never applied to the IRS for anything.”

Since 2007, the IRS has required all tax exempt organizations, even those that self-declared their tax exempt status, to file the annual Form 990N.  Read more here: http://homeschoolcpa.com/irs-form-990n-faq/

Your organization failed to file the 990-N for three years the and IRS has revoked your “self declared” tax exempt status.

Now you need to file the paperwork (Form 1024) to get back your tax exempt status that you didn’t need to apply for in the first place!

Crazy? YES!
Frustrating? YES!

A lot of small organizations have learned that their tax exempt status had been revoked and they didn’t even know about it!

I don’t think the IRS thought this through. I wish they had not revoked the status of 501(c)(7)s, but they did. I also wish they would allow a simple phone call to get reinstated instead of filing the paperwork and paying the IRS $400 fee.

Here’s the IRS webpage explaining how to get your tax exempt status reinstated. They offer 4 methods.

How to Have Your Tax Exempt Status Reinstated

If you find reading the IRS webpage a bit confusing, feel free to contact me and we can set up a personal consultation by phone to discuss your options.

Carol Topp, CPA

 

Is your homeschool organization a “mutual benefit” organization? Maybe not!

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Many homeschool organizations file to become nonprofit corporations in their state and they are usually asked:

Are you a mutual benefit corporation?

Well, most homeschool groups benefit their members with mutual support, so the answer is “Yes”, right?

Maybe not.

Most states recognize three types of nonprofit corporations:

  • Mutual Benefit
  • Public Benefit
  • Religious

You pick the type when you file Articles of Incorporation in your state.

 

A mutual benefit  nonprofit corporation provides an association of people with a common benefit. Mutual benefit corporations are formed for common gain purposes such as providing insurance for members (many insurance companies still have “mutual” in their names, such a Mutual of Omaha.) Other examples include social clubs, business leagues, and veterans groups. Homeschool support groups may fit this category.

A public benefit nonprofit corporations is organized for a public, educational or charitable  purposes. Examples of public benefit nonprofit corporations include charities, social service organizations, schools, foundations, and scientific and research organizations. Homeschool co-ops may fit this category.

Religious nonprofit corporations include those organized primarily or exclusively for religious purposes. Examples of religious nonprofit corporations include synagogues, churches and other places of worship.

Only public benefit and religious nonprofit corporations are eligible for 501(c)(3) tax exempt status with the IRS.

Mutual benefit nonprofits may be eligible for other types of IRS tax exempt status such as 501(c)(6) trade associations of 501(c)(7) social clubs.

 

Most homeschool co-ops are public benefit organizations because they serve a public good (i.e. education of children) and are not mutual benefit organizations.

 

Our Articles of Incorporation state we are a mutual benefit corporation. How do I change them?

You will have to amend the Articles of Incorporation. Start researching “amend nonprofit corporation and YOUR STATE”  on the internet. It usually involves holding a board meeting to change the Articles of Incorporation, filing some paperwork with your state and paying a small fee to your state (typically $30-$50).

Need to discuss this more? Contact me, Carol Topp, CPA,  and we can arrange a phone consultation to discuss your homeschool organization.

Homeschool group offering field trips is lost and confused!

Boys on field trip
We offer field trips, parties, meetups, and classes to homeschoolers.  Each person pays us the fee for the field trip or class, and we pay the venue.  We do not charge membership fees.  Most of our income comes from the chaperone tickets.
I am so lost.  When I took over this business, my predecessor told me that I did not need to file any paperwork at all.  I think I was supposed to file a postcard.  We “grossed” under $10K every year, but more than $5k.  I guess my goal is to be in compliance with any laws.
Jackie

 

Jackie,

Thank you for contacting me.

I looked at your website and I am amazed at the creative things that homeschool parents come up with to help others!  Neat stuff! 🙂

Now it’s up to me to try and figure out where you fit into the IRS nonprofit  structure.

Your group might be classified as a social club.
See this article and chart on how the IRS defines a social club.
http://homeschoolcpa.com/wp-content/uploads/2009/09/HomeschoolGroupsAs-SocialClubs.pdf

The advantage of a social club is that you do not have to apply for tax exempt status with the IRS. Social clubs can “self declare” their tax exempt status. Your previous leader was correct there, even if she didn’t know why!

The IRS does ask that all tax exempt organizations file the Form 990N, ePostcard, annually.
Carol Topp, CPA

What I learned from the IRS that can help homeschool support groups

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I attended a phone forum on 501(c)(7) tax exempt social clubs put on by the IRS recently.

The IRS didn’t address homeschool support groups specifically, but many homeschool support groups fit the definition of a social club because they are organized as a group of people with a common interest who gather face-to-face for pleasure, social or recreational purposes.

 

Here are some things I learned. The italics are from the IRS slides. The translation is my application to homeschool support groups:

Social clubs are tax exempt because “Members who pool their funds for recreational and social purposes should not be worse off than those who obtain recreational and social benefits on an individual basis.”

Translation: If homeschool support group members pool their money for a field trip, the support group does not pay tax on this pooled money.

 

Social Clubs should not have  written policy which discriminates against individuals seeking membership on the basis of race, color, or religion.

Exception: A social club can limit its membership to a particular religion if the limitation is a good faith attempt to further the teachings or principles of that religion and isn’t intended to exclude individuals of a particular race or color.

Translation: A homeschool support group may have a statement of faith for its members, but it must be because they wish to advance their religious views. The group cannot exclude people because of their race or color.

 

Substantially all of income must be from members for traditional recreational/social services or facilities.

Translation: At most 35% of your  support group’s income can come from sources like fundraisers; most of your money needs to come from membership dues.

 

A club that meets the requirements of exempt status can operate without recognition of its exempt status, but has no assurance the IRS agrees that the club is exempt.

Translation: A social club doesn’t have to file the IRS paperwork or pay their fees! They can “self declare” tax exempt status!

 

A social club files the appropriate Form 990 series return (990, 990EZ, 990N) each year.

Translation: A homeschool support group should be filing the online 990N (it’s only 8 simple questions) if their annual income is less than $50,000. If annual income is more than $50,000 they must file the longer Form 990EZ or 990.

 

A social club’s exemption will be automatically revoked if it fails to file its required Form 990 for three consecutive years.

Translation: Three strikes and you’re out! So file those 990Ns!

 

A social club must file Form 990T (including Schedule G for investment income) for years in which it has $1,000 or more in gross unrelated taxable income

Translation: If you have more than $1,000 of your income from fundraisers or interest on  a savings account, you have to file a tax form 990T and may owe tax on the fundraising profits. So keep those fundraisers to a minimum; most of your income should some from members’ dues.

 

If you’d like to see the slides from the phone forum they are available here: http://www.irs.gov/pub/irs-tege/c7%20phone%20forum%20slides_Aug%202013-_finalv2.pdf

If you have any questions on whether your homeschool group fits the definition of a 501(c)(7) Social Club, read this article. Homeschool Groups As Social Clubs

Still unsure or have more questions? Consider a phone consultation with me.

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

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