Converting from a homeschool support group to a full service nonprofit organizaton

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Lots of homeschool support groups find themselves evolving into bigger organizations than their founders imagined. They grew from being small monthly support groups to larger organizations offering field trips, co-op classes, graduation ceremonies, clubs, and other activities.

For example, TACHE (Tyler Area Home Educators) in Tyler, Texas began in the 1980s as a small support group for homeschool families. They grew to over 400 families and now manage an annual budget of nearly $20,000 and offer a plethora of educational activities.

They wisely decided to incorporate as a nonprofit corporation in 2009. But, unfortunately, TACHE did not apply for 501(c)(3) tax exempt status at that time.

In September 2013 TACHE  decided it was time to apply for tax exempt status as a 501(c)(3) educational organization and contacted me. Because TACHE waited more than 27 months after their date of formation (in 2009) to apply for 501(c)(3) status, we had to explain TACHE’s history to IRS and give an explanation why they did not apply earlier.

I helped TACHE apply for 501(c)(3) status in February 2014 and after about 7 months of waiting, the IRS granted 501(c)(3) status.

But TACHE wasn’t finished with the IRS just yet. TACHE failed to file their Form 990-N Annual Information Return with the IRS for three consecutive years and had their tax exempt status automatically revoked. We were concerned that there would be a period of time when TACHE would have to file and pay income tax. There were a few phone calls and letters to the IRS, but finally the IRS reinstated TACHE’s tax exempt status and agreed that they did not owe any back taxes.

The process is does not always take that long, but here are a few lessons learned.

  • Don’t delay! Apply for 501(c)(3) tax exempt status within 27 months (or sooner) from your date of formation (usually the date of incorporation in your state as a nonprofit corporation)
  • File the Form 990-N every year. This is required for support groups as well as homeschool co-ops. If you fail to file the Form 990-N, the IRS will automatically revoke your tax exempt status.
  • Get help when you need it. My fees are reasonable and I focus on helping homeschool organizations.  Contact me.
  • Be patient. Although the IRS has cleared a lot of their backlog, it still took 11 months for the IRS to reinstate TACHE’s tax exempt status.
  • Learn all you can about tax exempt status for your homeschool group. My book, The IRS and Your Homeschool Organization, is a good start.

Congratulations to TACHE! It was along process, but it’s finished and TACHE can continue to serve homeschool families in Texas for many years to come.

Carol Topp, CPA


I will be recuperating from surgery and will be unavailable to answer your emails from November 15, 2015 until January 2016. Until then, here’s how you can get help.


Congratulations to homeschool groups on tax exempt status!

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Congratulations to several homeschool organizations recently granted 501(c)(3) tax exempt status by the IRS!

  • LifeShine from San Antonio, TX
  • Grace Home Educators of Martinsville, IN
  • United Christian Homeschool Association in Belton, KY
  • SCOPE Homeschool Group in Ashville, AL

Both Lifeshine and Grace had their tax exempt status automatically revoked for failure to file the IRS Form 990 for 3 consecutive years. Fortunately, I was able to help them get their tax exempt status reinstated and neither group owed any back taxes. Yeah!

Do you know about the IRS required annual reporting for ALL nonprofit organizations (that means your homeschool group, even if you never had to file any reports with the IRS before)?

Do you have questions about the tax exempt status of your organization?

Contact me and I will help your homeschool organization get tax exempt status (or get it back if it was revoked).

It’s better than paying taxes!

Carol Topp, CPA

 

More tips on running a homeschool co-op (podcast)

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Carol Topp, CPA the author of Homeschool Co-ops: How to Start Them, Run Them and Not Burn Out  covers more tips to starting a homeschool co-op in her podcast.

Listen to the podcast

Carol answers questions from homeschool leaders including:

  • insurance
  • background checks
  • tax exempt status from the IRS
  • required annual reporting to the IRS
  • the need for bylaws and policies

Listen to Part 1 of this podcast.

For more information on starting and running a homeschool co-op visit Carol’s website HomeschoolCPA.com

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Homeschool Co-ops: How to Start Them, Run Them and Not Burn Out has helped more than 1,000 readers run their homeschool co-ops. Get your copy here.

Carol has more podcasts for homeschool leaders. See the list of topics.

Can a Classical Conversations community be a tax exempt nonprofit?

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I am directing a local Classical Conversations group, and many churches in our area
will not consider housing us because we are not a nonprofit. Since I am basically an independent contractor licensed by CC corporate to run a community in my area, am I potentially eligible to have my community declared a nonprofit?

-Jen, Classical Conversations Director

 

Jen,

I recently discussed nonprofit status for CC Communities with Classical Conversations COO, Keith Denton.  He explained to me that “CC Directors (who are licensees of CC) may form an entity through which to run their homeschooling operations.

CC does not require a director to run his/her homeschooling program through an entity, nor does it require that such director choose a specific type of entity (non-profit versus for profit) for its homeschooling community.

CC recommends that all directors consult with an accountant and lawyer when making the decision of whether to form an entity, and what type.  The decision of which entity to form depends on a variety of factors specific to the director and state where the homeschooling community is formed.  As such, consultation with an attorney and accountant in a director’s community is highly recommended to best address all relevant factors. ”

That was very helpful!

I can help you weigh the pros and cons of for profit or nonprofit status for your CC Community. Contact me to schedule a phone consultation.

Carol Topp, CPA

A new nonprofit corporation. Do they need to reapply for 501c3 status?

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Hi Carol,

I have been listening to your podcasts. Our group is already a 501c3 registered charity with the IRS. Unfortunately, we registered with our state as an unincorporated association. We would like the limited liability of a non-profit corporation and have the funds to apply, but after listening to your podcast I have a few questions:

1) Do we need to set up a new bank account? Or just change the set up on our current accounts? We have a Paypal linked, Amazon Smile account, Cash for Our Cause through our bank.

2) Will this affect anything with our IRS account? We won’t have to re-apply for 501c3 status will we?

Thanks for your help!
Misty in Texas

 

Misty,

I hope some of my podcasts were helpful! Thanks for listening.

Bad news: You need a new EIN and must reapply for tax exempt status

If your organization now wishes to become a nonprofit corporation (and I highly recommend it), you will have to get a new Employer Identification Number (EIN) and re-apply for 501(c)(3) tax exempt status in the name of your new corporation with its new EIN.

When you create a corporation, it is a new legal entity. So the IRS wants you to get a new EIN and makes you go through the 501(c)(3) application process again. Bummer.

Here’s a recent blog post on that issue: http://homeschoolcpa.com/incorporated-in-your-state-time-for-a-new-ein/

Good News: It’s easier to apply for 501(c)(3) status

Fortunately, the IRS does have a new short application for 501(c)(3) status, Form 1023-EZ. I have assisted about 25 nonprofit organizations get tax exempt status the new Form 1023-EZ. Some have received their tax exempt status in 10 days. That’s much faster than the 3 to 13 months in the past! Contact me if you’d like my help in applying (or reapplying) for tax exempt status.

The bank should make you open a new bank account with the new EIN. Paypal, Amazon Smile, etc. probably don’t care about your new corporate status, but you will need to re-connect them to your new bank account.

Carol Topp, CPA

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 to know your status with the IRS

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We are trying to figure out what our status with the IRS is. We are a support group/co-op and just recently learned that we should be filing the 990N. We registered our name with the state in 2008. We got out EIN in 2009. We became incorporated in September 2014. Our annual gross revenue is less than $5,000.

 We have searched the IRS database of groups that have had their tax exempt status revoked and we are not listed. How do we find out what our status is and when the IRS is considering our date of formation so we know how to proceed?
Thanks for your help!
Anna in Ohio
Dear Anna,

You referred to an IRS database of exempt organizations called Select Check. I use it frequently to check on the status of nonprofit organizations.

But many times a homeschool nonprofit organization cannot find their name in the IRS database, usually because they have not applied for tax exempt status. That’s the situation for your group.

Your legal status is that you are a nonprofit corporation who can self declare your 501(c)(3) tax exempt status. Since your revenues are less than $5,000,  you can self declare your 501(c)(3) tax exempt status and do not have to officially apply for tax exemption.

The IRS considers your date of incorporation as your “date of formation.” You should get a new EIN for the new corporation and not use the old EIN from 2009. The IRS considers a corporation a new legal entity and you should get a new EIN to match it. Getting and EIN from the IRS

Even though you didn’t have to officially apply for 501(c)(3) status, the IRS does require you to file an annual information return, the Form  990-N. To be able to file the Form 990-N, you need to call the IRS Customer Account Services at 1-877-829-5500 and ask to be added to their exempt organization database so you can begin filing the Form 990Ns. It typically takes 6 weeks after you call to be added to the IRS database.

Say something like this,

“We’re a new 501(c)(3) educational organization and my CPA said I needed to get added to the IRS exempt organization database so we could start filing our Form 990-N.”

They will ask for :

  • your EIN(Employer Identification Number)
  • organization’s name
  • address
  • a contact name
  • Date your fiscal year ends. Many support 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 (SS-4) to see what you chose as your fiscal year end.
  • They may ask if you have “organizing documents.” They mean bylaws, Articles of Association, or Articles of Incorporation.

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.

Be sure you go online 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.

Tax Exempt Status for Homeschool Support Groups (podcast)

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Carol Topp, the Homeschool CPA, explains tax exempt status for homeschool support groups in her latest podcast episode.

She discusses what she learned about tax exemption from a recent webinar conducted by the IRS including:

  • Qualifications to receive automatic tax exemption from the IRS
  • In religious discrimination allowed or not?
  • Mandatory annual reporting to the IRS for support groups

Carol also discusses the advantages of forming as a nonprofit corporation.

Listen here

 

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Carol’s book, The IRS and Your Homeschool Organization, discusses the advantages of tax exempt status for homeschool organizations.

Carol also mentioned her book, Money Management in a Homeschool Organization.

 

Carol’s podcast, the Dollars and Sense Show, airs twice a month at DollarsAndSenseShow.com. If you’re a homeschool leader you might find these other podcasts helpful:

Episode #6  What is tax exemption and how do I get it for my homeschool organization?
Episode #30 Easy fundraisers for homeschool groups
Episode #36 Required IRS reports for homeschool groups
Episode #37 Has your homeschool group lost its tax exempt status?
Episode #41 Who’s afraid of the big, bad IRS?
Episode #42 How the IRS sees homeschool co-ops.

Will fundraisers cause a homeschool support group to pay taxes?

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I looked at the description of the 501c(7) Social Club status, and also reviewed your comparison chart between c3 and c7 status. I agree that our homeschool group most closely fit the 501(c)(7) Social Club status.

However, I was wondering if our periodic fundraisers would cause us to be taxed – your chart says on income from other sources.  We hold the fundraisers when our funds from membership are too low to pay the rent and other costs.
Thank you,
Lisa R

 

Lisa,

I’m glad you’ve figured out the differences between 501c3 charity and 501c7 Social club status. It’s important to figure out where your group fits.

You asked if periodic fundraisers would cause you to be taxed. It could be a problem, but not likely.

In general, fundraisers are considered “unrelated income” and nonprofits must pay tax on unrelated income (called Unrelated Business Income Tax, or UBIT).

Fortunately, the IRS offers several ways to avoid the UBIT tax. The exceptions include:

1. If the fundraiser was substantially conducted by volunteers (if no one was paid to run the fundraiser, then the proceeds are not taxed)

2. The fundraiser proceeds under $1,000 is not taxed.

The IRS has more exceptions to UBIT, but one or both of these exceptions to paying unrelated business income tax probably apply to your group.

Additionally, the IRS requires 501c7 Social Clubs to have most of their income come from membership fees (65% or more). You probably saw that on the chart comparing 501c3 to a 501c7 Social Club.

So make sure that your fundraisers stay under 35% of your total income. You said they are periodic and sound as if they are secondary to your membership fees (“We hold the fundraisers when our funds from membership are too low to pay the rent and other costs”).

I hope that helps.

Carol Topp, CPA

How the IRS sees homeschool co-ops (podcast)

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In this episode of the Dollars and Sense Show podcast, host Carol Topp continues her topic “Who’s Afraid of the IRS?” and discusses how the IRS sees homeschool co-ops and 501(c)(3) tax exempt status.

Listen to the podcast

Listen to the first part of this presentation where Carol discussed homeschool support groups and IRS 501(c)(7) tax exempt status as a Social Club.

Get a copy of the handout.

Carol also mentioned the article “Do You Know About IRS Required Filings for Homeschool Organizations?” Get it here.

The IRS and Your Homeschool Organization

Carol’s book, The IRS and Your Homeschool Organization, is available here.