Do You Know About IRS Required Filings for Homeschool Groups?

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Homeschool leaders frequently wonder, “Is my group supposed to be paying taxes to the IRS?” They ask if there is anything they should be reporting to the IRS, if so what and when.

Homeschool Contact With The IRS
There are several situations when a homeschool organization will be in contact with the IRS:

1. Your homeschool group opens a checking account and needs a tax identification number.

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. An EIN is similar to a Social Security Number for a business or nonprofit organization. They are available from the IRS at no charge at www.IRS.gov. Search for Form SS-4, the application for an EIN.

2. Your homeschool group pays a worker.

Your worker may be an independent contractor or an employee. Either way, there are forms to file with the IRS at the end of the calendar year (typically a 1099MISC or W-2, respectively). Additionally, there are employer taxes, such as Social Security or Medicare taxes, to pay in addition to employee wages. My books Paying Workers in a Homeschool Organization and Money Management in a Homeschool Organization will walk you through the details of hiring and paying workers.

3. Your group makes money from fund raisers, selling T-shirts and other merchandise, or selling advertising on your website.

Homeschool groups often make money from activities not related to homeschooling. The IRS calls income from these activities “unrelated business income (UBI)” and will tax the profit from these activities. Usually homeschool groups avoid the UBI tax by using one of the IRS exemptions which include using all volunteer labor, selling donated merchandise or having unrelated business income of less than $1,000 annually.

4. Your homeschool co-op brings in income of more than $5,000 in a year.

If your co-op’s gross revenues are more than $5,000 a year, your organization should file an application (Form 1023 or the new, shorter Form 1023-EZ) with the IRS for 501(c)(3) tax exempt status. Approval of tax exempt status by the IRS means that your co-op will not pay income tax on its financial surplus. Your organization is also eligible to receive tax deductible donations and may participate in fundraisers only open to 501(c)(3) organizations, such as Box Tops for Education.

If your organization’s gross revenues are under $5,000 a year, you are granted an exception from filing the application paperwork for 501(c)(3) status. You can “self-declare” your tax exempt status without applying. But you will still have annual reporting requirements, the Form 990N (see below).

5. Your homeschool support group wishes to avoid taxes on their surplus.

If your homeschool organization is a support group, then you may be eligible for tax exempt status as a 501(c)(7) social club with the IRS. Social clubs can “self-declare” tax exempt status but some file an application (Form 1024) with the IRS. Read more about eligibility for 501(c)(7) social club status at HomeschoolCPA.com/SocialClub. Even if you self-declare tax exempt status for your support group, the IRS still requires an annual report (see below).

New IRS Filing Requirement for All Nonprofit Organizations

As of 2006, the IRS requires all nonprofit organizations (except churches) to begin filing an annual information return called a Form 990/990EZ or 990N, even if they have not yet applied for tax exempt status or are eligible to self-declare tax exempt status. The short, online Form 990N is for nonprofit organizations with annual gross revenues under $50,000. It is a very simple online form with only six questions. No financial information is given.

A. Calendar year or tax year dates
B. Check if gross revenue is $50,000 or less
C. Name and address of the organization
D. Employer Identification Number (EIN)
E. Website
F. One officer’s name and address

The Form 990N is filed online at Epostcard.form990.org and is due due 4 1/2 months after the end of your fiscal year (May 15 for groups that run on a calendar year).

Your organization may have difficulty in filing the Form 990N if you have not applied for tax exempt status. You will have to call the IRS Customer Account Services at 1-877-829-5500 and ask to be added to their exempt organizations database so you can begin filing the Form 990Ns. It typically takes 6 weeks to be added to the IRS database.

 

What Happens if Your Organization Doesn’t File the Form 990N?

There is no financial penalty for late filing, but failure to file the Form 990N for three consecutive years means automatic revocation of tax exempt status. Lately, I have helped several homeschool organizations that did not file their 990Ns for several years (most did not know about the requirement) and had their tax exempt status automatically revoked.

If all this seems confusing or overwhelming, please visit HomeschoolCPA.com. On the blog page, type “990N” into the search box and read the blog posts about this IRS filing requirement.  Additionally, my book The IRS and Your Homeschool Organization can give you details on applying for tax exempt status.

 

Carol Topp, CPA is an author, accountant and retired homeschool mom. She is the author of Homeschool Co-ops: How to Start Them, Run Them and Not Burn Out, The IRS and Your Homeschool Organization and Money Management in a Homeschool Organization: A Guide for Treasurers. She shares her experience as a CPA, homeschool mom and co-op treasurer in her books, at homeschool conventions and on her podcast DollarsAndSenseShow.com. Carol offers consulting services to homeschool leaders. Contact her on her website HomeschooCPA.com.

 

Please share! You have permission and are encouraged to share this article in full on your websites, blogs, publications and via email. I do ask that your share the full article (no deletions) and credit me as author, include a link to HomeschoolCPA.com and include my biography at the end of the article. Thank you!

HomeschoolCPA Carol Topp at 2014 HSLDA National Conference

 

Homeschool School Legal Defense Fund Association (HSLDA) 2014 National Leader Conference will be held in my backyard. Well, not in my real backyard, but awfully close!

The 2014 Conference will be held in Erlanger, Kentucky, only about 30 minutes from my home.

Register here

I am honored that they have invited me as one of their speakers. I will be speaking to homeschool leaders from across the country on:

Who’s Afraid of the Big, Bad IRS? How the IRS Sees Homeschool Organizations

and

Tax Exempt Status for Homeschool Organizations: The Pros and Cons 

 

I hope to meet some of you there! If you cannot attend be sure to tell your state representative to attend one of my sessions and take good notes for you!

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.

Should your homeschool group have members? Maybe not!

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

 Does your corporation have members?

 Well, naturally most homeschool groups have members, so the answer is “Yes”, right?

Maybe not.

 

Read the question carefully. It asks if your corporation has members. Your group may have members, but not the corporation.

What’s the difference?

For-profit corporations have shareholders. These shareholders are entitled to a vote on matters brought to their attention. A nonprofit corporation may have members, but is not required to have members. If a nonprofit corporation has members, then those members are entitled to a vote on matters brought to them. Typically, this might be electing board members, approving the budget, choosing  to hire paid staff, etc. (the bylaws usually spell out what members vote on).

Voting memberships are useful when an organization wishes to be democratically controlled by its constituents. Voting memberships structures are commonly used by member driven organizations such as social clubs, churches, chambers of commerce and trade associations. In such cases, the organization exists to serve its members and its makes sense for control to be vested in the members.

Source: http://charitylawyerblog.com/2011/04/26/nonprofit-law-jargon-buster-voting-members-vs-self-perpetuating-boards/

Some nonprofit corporations do not have members; instead decisions are made by the board. The members do not have a vote, nor do they elect board members. The board appoints replacement board members (it’s called self-perpetuating).

Many homeschool organizations may have members participating in their activities (co-op classes, field trips, clubs, etc), but not have voting members of the corporation. Instead, they have a board that makes the decisions.

Advantages of a board-run organization (i.e., no members of the corporation)

  • A board-run homeschool group does not have to gather members together for a vote.
  • Decisions can be made more quickly.
  • A smaller group of people, the board, makes the decisions

Disadvantages of a board-run organization (i.e., no members of the corporation)

  • No input from the members
  • The board replaces itself and could become insular with no new ideas.

 Should your homeschool nonprofit corporation have members?

Well, of course, that is up to you, but I believe that it is more cumbersome for most homeschool organizations to have voting members. Many homeschool organizations are run by a self-perpetuating board very successfully.

What if your Articles of Incorporation state you have members, but you want to change that?

You will have to amend the Articles of Incorporation. This will probably take a vote of the members. State law dictates who can change the form of the corporation. Start researching “amend nonprofit corporation and YOUR STATE”  It usually involves holding a member meeting to change the Articles of Incorporation, filing some paperwork with your state and paying a small fee to your state (typically $30-$50).

 

Carol Topp, CPA

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Church requires homeschool group to have insurance

insurance
Carol,
A local church is requiring us to have insurance to rent their facility.  That has never been needed before.  Do you have any comments about or guidance for us regarding that?  I’m curious about what you’ve seen with other organizations, suggestions for getting short or long term coverage, etc.  Just what you know off the top of your head.
Thanks so much!
Natalie B in Texas

 

Natalie,

I wrote an article on insurance for homeschool groups. There are 3 types in insurance a homeschool group might be interested in buying. Sounds like you need the general liability type.
Insurance for homeschool groups

Some homeschool groups have a hard time finding insurance, but one homeschool leader found a helpful insurance company.

These blog posts I’ve written about insurance will be helpful.
http://homeschoolcpa.com/blog/insurance/

I hope that helps!

Carol Topp, CPA

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

IRS requires homeschool support group to have “organizating documents”

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(Background: Lisa’s homeschool support group decided to officially declare tax exempt status as a 501(c)(7) social club. Lisa called the IRS to be added to their database so that she could file the annual Form 990N as the IRS requires of all nonprofit organizations.)

Carol,

I just spoke with the IRS about being entered into their database.  I am frustrated.  The first question she asked me was whether we have an organizing document. After I said we don’t, but are self declaring 501c7 status, she informed me that unless we have an organizing document, we don’t have standing with them and are not considered an exempt organization, so we wouldn’t file a 990N.

Lisa in PA.

 

Lisa,

How extremely frustrating the IRS can be!

Organizing documents are:

  • Bylaws
  • Articles of Association for unincorporated organizations.
  • Articles of Incorporation for organizations that decide to form a nonprofit corporation in their state.

Most homeschool support groups do not incorporate in their state. They remain unincorporated associations. (Sounds nice and official, doesn’t it?)

Homeschool co-ops or other large groups frequently incorporate as nonprofit corporations in their state and go on to apply for tax exempt status with the IRS.

Read more about nonprofit incorporation:

Your homeschool support group  won’t ever send the IRS your “organizing documents” since you are self-declaring tax exempt status as a social club and do not have to file a Form 1024 to apply for 501(c)(7) status.

But it’s still a good idea for a homeschool support group to have bylaws and Articles of Association. They spell out the foundation of your group’s purpose, membership, and how the board is chosen.

Your homeschool support group could create bylaws or “Articles of Association” (I added a sample to my Sample Documents page) as your organizing documents.

Your board should vote to approve the bylaws or Articles of Association, but you don’t have to file the document with the state or the IRS.
Then call the IRS again, hope for another person this time, and see if you can get into the IRS database.

 

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

Three questions to ask graduated homeschool moms

Janice Campbell

My friend and blogger Janice Campbell recommends current homeschool moms ask graduated homeschool moms these three questions:

  1. What is the most delightful memory you have of homeschooling?
  2. What was the worst mistake you made when homeschooling?
  3. What do you wish you had known while you were homeschooling?

I’m a graduated homeschool mom. After 14 years of homeschooling, both of my daughters are now in college.
I stay a member of my local homeschool network and my support group leader, Chrissy, asked me to come to their kick-off dinner in a few weeks and share my experiences with current homeschool moms.

I’m going to do that and I hope someone there asks me these three questions! I have my answers all prepared. 🙂

Tip to support group leaders: if you want us graduated homeschool moms to stay involved, do what Chrissy did. She invited me to come on a specific night. Otherwise, I don’t feel like I fit in anymore.
I also think a panel of graduated homeschool moms answering the 3 questions would be a neat idea for a support group meeting.

Carol Topp

 

Self-proclaimed tax exempt status for 501c7 Social Clubs

Photo credit: Money.cnn.com

Carol,

I thought our homeschool organization had reached a conclusion on this issue and self-proclaimed 501(c)(7) status as you recommended. However, we have a new treasurer who wants documentation. I have searched the internet and cannot find anyone else talking about “self-proclaimed” status for 501c7 Social Clubs. I have read Pub 557 and the 1024 instructions and do not find an exception to the filing requirement. Can you point me to your source for this info?

Thanks, Cynthia

Cynthia,
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.

Here’s a link to the IRS video and transcript from the webinar. The question I asked and the IRS’s reply can be found on page 39
http://www.irsvideos.gov/StartingOffRightNON501c3/

I hope that helps!

Carol Topp, CPA