Is ignorance of tax law a good defense for homeschool teachers?

A homeschool leader became concerned about a paid teacher in her homeschool group. It seems this woman has not reported her income from teaching at the homeschool program for 7 years!

The teacher has refused to listen when others try to explain her tax obligation.

The leader told me that the teacher “stops me in mid sentence because she wants to claim ignorance if she were to get audited.”

She believes she could claim, “I didn’t know.”

 So is ignorance of the tax laws a good defense?

Not typically!

Typically, ignorance of the law is not a defense in our criminal justice system.  Under a long-standing legal fiction, defendants are, instead, presumed to know the law. Source: https://www.freemanlaw-pllc.com/cheek-defense-federal-tax-crimes/

 

But in this case, the teacher is NOT ignorant of her obligation to report her income.

She is willfully blind.

“Most courts agree that if the taxpayer willfully remains “blind” to his or her obligations under the tax laws, no valid defense can exist.” Source: https://thetaxlawyer.com/…/tax-law-mistake-ignorance…

 

In other words, since the paid teacher is being willfully blind, she has no defense as to why she is evading income tax.

And as a taxpayer I don’t like it when other people evade taxes!

 

Your responsibility as a homeschool leader is to file the required reports, either a 1099-MISC (for Independent Contractors) or W-2 (for employees) with the IRS by January 31 each year.

 

My book Paying Workers in a Homeschool Organization explains the required reports your homeschool group should be giving to its workers (and a whole lot more!)

Carol Topp, CPA

HomeschoolCPA.com

We don’t want 501c3 status. Should we still include the IRS language in the Articles?

We recently formed a non-profit in Texas but do not want to file for 501c3 tax exempt status.  When we created our bylaws your site was very helpful to us.  I thought I read somewhere on your site that it is better to include the IRS 501c3 verbiage from the beginning so that if we ever decided to do that, it would already be included.

I now can not find where I thought I read that.

Do we need to include it anyway or should it be left out if we have no plans on filing 501c3?

Thanks so much,
Cathy

 

Cathy,

The IRS requires their specific language to be included in your “organizing documents.” That’s usually the Articles of Incorporation or Articles of Association if your group is not a nonprofit corporation.

This requirement is found in the IRS Instructions to the Form 1203 Application for Tax exempt Status and IRS Pub 557 Tax Exempt Status for Your Organization (p. 22)

If you have no plans to request tax exemption as a 501(c)(3) charitable or educational organization, then your Articles of Incorporation do not have to include the IRS required language.

 

But, being a CPA, I always think about money and taxes, so I will warn you that without 501 tax exempt status of some kind (501c3 or c4 or c7), your organization must be filing a corporate income tax return, IRS Form 1120, every year and paying  federal taxes on any surplus you had that year. Texas may have a corporate or franchise tax as well.

By the way, that Form 1120 can be pretty complex. You’ll probably need professional help from a CPA to prepare it. You have to prepare and submit this form every year even if you didn’t have any profit! The Form 1120 shows the IRS that you didn’t have any profit!

So, you might want to reconsider your decision not to apply for tax exempt status.

I’m happy to discuss the pros and cons of tax exempt status with your board. Contact me.

 

Carol Topp, CPA
HomeschoolCPA.com

Holding a fundraiser to pay for homeschool curriculum

Photo credit TheMagicOnions.com

 

I homeschool my 3 children and 3 children of another family. As a project, we learned how to create a school website and as a idea to raise money for curriculum, supplies and hopefully a field trip or two. We’re in NC and also considered a private school.

We thought of an idea to sell Fairy Gardens that we personally make and accept donations on our website. Am I breaking any laws by not being registered as a business or non profit? 100% of profits will be spent on the school, but it goes to my own PayPal account and I state on the website that receipts for the donation being spent on the school and states that the donations are not tax deductible.

It dawned on me that it might not be allowed to do this without some kind of permit. I’m not sure though because I would be allowed to make fairy gardens and sell at a yard sale, so is it different if I sold them online?

Also, can I be a non-profit since I homeschool the children of two families and not just my own? I would greatly appreciate your feedback on this and thank you so much for all of the knowledgeable information you’ve shared on your site!

Best wishes,

April in North Carolina

 

 

April,
You and the other family are not a nonprofit organization, even if North Carolina classifies your homeschool as a private school. Private school  only means you are not funded with public (i.e. government) funds. It does not make you or your business a nonprofit organization. (BTW, some private schools are for-profit businesses.)

In order to be a tax exempt nonprofit, the IRS says you must be operated and organized as a nonprofit.

A tax exempt nonprofit organization “must not be organized or operated for the benefit of private interests” (Source: https://www.irs.gov/charities-non-profits/charitable-organizations/exemption-requirements-section-501c3-organizations).

So benefiting only you and the other family is “private interests” and not serving a public good, therefore you cannot be a nonprofit organization with only two families getting all the benefits.

Your fairy garden business is NOT a nonprofit. It is a business, probably a micro business. Stop calling your sales “donations.” They are simply sales of products (fairy gardens in your case) by a business.

You probably need to register in North Carolina as a business and probably get a vendors license to collect and pay sales tax.
Better start googling “Start a small business in North Carolina.”

 

My books Micro Business for Teens could help your children start this as their business (not yours) and learn a lot too!

 

 

 

 

 

 

Additionally, your comment about selling your products at a yard sale is not quite correct. You can sell fairy gardens at a yard sale, but then you’re running a business and the profit is taxable. In yard sales, you are generally selling household items you bought over many years and used personally and selling them for less than you paid for them. But that’s not true for your fairy gardens. You did not use them personally and you are selling them at a profit, so it’s a business and you should register it and apply for a vendor’s license.

 

Carol Topp, CPA

Do CC Directors pay for their own children’s tuition?

Karen, a homeschool leader involved in Classical Conversions asked,

Do Classical Conversations (CC) Directors have to write a check (to themselves) for full tuition for each of their kids?

No. A CC Director does not have to pay her own business tuition for her own children. 

Here’s why:

CC Corporate wants a Director to pay their licensing fee based on student enrollment/tuition collected, so a CC Director should track the total tuition collected INCLUDING HER OWN CHILDREN. That way she is paying CC Corporate the correct amount.

But for tax purposes, a CC Director DOES NOT write her business a check for her own children’s tuition and does not include her child’s tuition in the income reported on her tax return (I’m assuming the Director is operating her business as a sole proprietorship and is not an employee of her own business).

The reason is that a person should not be taxed when they avoid paying for services by providing the services to themselves. It’s called imputed income. There was a court case in 1928 that ruled that the imputed income from produce grown and eaten by a farm owner is not taxable as income to the farmer.[9]

Conclusion: A Director must keep track of the tuition she would owe for her children so that she pays CC Corporate the correct licensing fees, but she does not need to write a tuition check to her business and she should not report her child’s tuition as taxable income on her business tax return.

Carol Topp, CPA

HomeschoolCPA.com

My book Taxes for Licensed Classical Conversations Directors is available through Classical Conversations. Find it  in the Directors Licensing Guide  page 54, Appendix M and click on “this document.”

Can CC Director offered reduced tuition to her tutors?

 

Can a Classical Conversations director gift an Independent Contractor or employee with free or reduced tuition?

Suzy

 

Suzy,
A Classical Conversations (CC) Director can give educational benefits (i.e., discounts on tuition) to Independent Contractors (IC) or employees, but (and this is a big, “but”) the value of these educational benefits is taxable income and must be reported on their W-2 or 1099-MISC.

So a CC director can offer a tuition discount to an IC or employee, but must add the value of that discount to the tax reports she gives to her tutors (1099-MISC or W-2).

And the worker must report her paid wages and the value of this discount/gift on her tax return as taxable income. You should warn her about that in writing and face-to-face, so they aren’t surprised at tax time!

We think that taxable income is only what comes in a paycheck, but the IRS defines taxable compensation to include “educational benefits.”

compensation includes salary or wages, deferred compensation, retirement benefits…, fringe benefits (personal vehicle, meals, lodging, personal and family educational benefits, low interest loans, payment of personal travel, entertainment, or other expenses, athletic or country club membership, and personal use of your property), and bonuses.[i]  (my emphasis added)

[i] Instructions for Form 1023 https://www.irs.gov/instructions/i1023/ch02.html#d0e1909

So, yes, a CC Director can offer free or reduced fees to an Independent Contractor or employee, but it is not a gift; it is taxable income and must be included in their wage and income reporting.

A CC Director should also check her license agreement with Classical Conversations to see if reduced fees are allowed.

If you have additional tax questions about being a CC Director, I wrote an ebook that can help!
Taxes for Licensed CC Directors is available from Classical Conversation. Find it here
Carol Topp, CPA
HomeschoolCPA.com

Can homeschool groups give free tuition to teachers like private schools?

I taught at a private school before I started homeschooling and I received free tuition for my children. Now I teach at a homeschool program. Can homeschool groups give free or reduced tuition as a fringe benefit like private schools?

 

Maybe!

You’re talking about what the US Tax Code calls “Qualified tuition reduction.”

The United States Tax Code, or 26 U.S.C. § 117(d) has some good news:
 In General. – Gross income shall not include any qualified tuition reduction.
“qualified tuition reduction” means the amount of any reduction in tuition provided to an employee of an organization described in section 170(b)(1)(A)(ii)

 

In plain English that means a school may provide its employees with tuition breaks, or cash grants for payment of tuition, without that benefit being considered taxable income to the employee. Good news for school employees!

But notice a few important words: employee and school

Are you an employee of the homeschool program?

If so, keep reading. But if you are an Independent Contractor, you cannot get tax-free tuition reduction benefits.

Is the homeschool program you work for as an employee a “school”?

The US Tax Code defines a school in section 170(b)(1)(A)(ii):

 An educational organization is described in section 170(b)(1)(A)(ii) if its primary function is the presentation of formal instruction and it normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. The term includes institutions such as primary, secondary, preparatory, or high schools, and colleges and universities. It includes Federal, State, and other public-supported schools which otherwise come within the definition.

 

One aspect of a school is a “regular faculty,” which the IRS defines as

“qualified teachers instruct the students, and the same teachers do so on a recurrent basis.” 

Source: Internal Revenue Manual viewed http://www.irs.gov/irm/part7/irm_07-026-002.html#d0e549 on 5/11/15.

And by “qualified” the IRS means:

“certifications by the appropriate state authority or successful completion of required training.” 

Source: Instructions for Form 1023

Hmmm…

…regular faculty…regularly enrolled student body…qualified teachers…recurrent basis…teacher certifications…

Do those words used to definition a “school” apply to your homeschool program?

Maybe. Or maybe not. It might be hard to tell what the IRS meant since this part of the US Tax Code was written long before anyone thought of homeschool programs employing teachers.

Here’s my concern: If a homeschool program fits the IRS and US Tax Code definition of “school” so that its employees can get tax-free fringe benefits, is that homeschool program also a school in the eyes of its state laws regarding private schools? And are the students then attending a school and not really legally homeschooling?

Additionally, since states regulate education in the USA, your state’s definition of school may be VERY different from the US Tax Code’s definition.

It gets confusing. Very confusing. I’m a pretty conservative CPA and don’t like advising my clients unless things are pretty clearly stated in the tax code.

I also don’t want homeschool programs to be treated as schools or to even call themselves schools. I’m concerned that if homeschool programs call themselves “schools” the state may start imposing all the rules that schools must follow onto independent homeschool programs. That will stifle creativity, educational freedom, add a paperwork and reporting burden, and may end up restricting our homeschool freedoms.

It’s just not worth it!

My advice: Avoid attempting to fit the US Tax Code definition of “school.” Avoid even calling your homeschool program a school with both the IRS and with your state. Maintain homeschooling freedom even if it means you cannot offer your employees tax-free fringe benefits of “qualified tuition reduction.”

You may decide differently from what I wrote above. You may decide your homeschool program is a “school” by the IRS and US Tax Code definition. But if you do, please, please get a legal opinion on your organization’s status as a school from a qualified attorney experienced in educational institutions and get it in writing. Yes, you’ll have to pay for it, but it will be your defense if your State Board of Education wants to regulate your homeschool program!

 

Carol Topp, CPA

My homeschool is a private school. Can I use 529 funds?

I explained in “Can homeschoolers use 529 plans? Maybe!” that you can use 529 savings account funds for tuition paid to a public, private, or religious school.

Some homeschool students take classes from private schools (locally or online). The tuition payments to these schools can use 529 funds without  penalty or taxes.

So that begs the question,

“In my state, my homeschool is considered a private school. So can I use 529 funds for my private school/homeschool expenses?”

No. Sorry!

Here’s why:

The expenses must be to pay tuition. You don’t pay yourself tuition! That would be silly and not tax-smart.

Your other homeschool expenses such as books, curriculum, school supplies, field trips and are not paymnets for tuition and so you cannot use 529 funds without paying a hefty penalty!

Tuition payments to organizations that are not schools like your local co-op, Classical Conversations, etc.  cannot use 529 funds either (without incurring taxes and a 10% penalty!)

Carol Topp, CPA

Does using a distance learning program mean I can use 529 funds?

 

If you are homeschooling using an accredited, distance learning program like Mother of Divine Grace where you pay tuition, can you then use your 529 plan money?

Katie in Indiana

 

Katie,

529 plans have been a popular way to save for college expenses and have the gains be tax-free when used for qualified educational expenses. The Tax Cut and Jobs Act or 2017 expanded the use of 529 plans to include K-12 expenses. The laws says this about using 529 plans for K-12 expenses:

the term ‘qualified higher education expense’ shall include a reference to expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.” (emphasis added)

There are 2 conditions for you to use 529 funds for K-12 expenses:

1) the costs must be for tuition and

2) the institution you pay must be “a public, private, or religious school

Mother of Divine Grace (MODG) is a California for profit corporation that describes itself as a private school and a private distance school in their California filings.

So if your children are enrolled at MODG (or similar private schools offering distance learning), you paid MODG tuition, and MODG is a school, then you can use your 529 plan to pay for tuition.

Homeschool parents should check with the program to whom they are paying tuition to determine if it is a school according to their state’s definition. If you have any concern about their status as a school, then do not use 529 funds to pay for the tuition. Withdrawals from a 529 fund that are not “qualified” (i.e. tuition paid to a public, private, or religious school) then you must pay income tax and a penalty of 10%. Ouch!

Your other homeschool-related expenses such as books, supplies, equipment, and payments to organizations that are not schools (like a homeschool co-op) cannot use 529 funds.

Carol Topp, CPA

 

 

Where to find the Taxes for CC Directors ebook

 

I know its the day AFTER tax filing season ended, but I just learned from two helpful people (thank you!!) where to find the ebook Taxes for Licensed CC Directors.

 

Here is what I was told:
The link is in an updated (updated March 29th) version of the Director’s Licensing Guide (DLG) on page 54.
At the end of a paragraph on that page, there is a sentence saying for more information see Appendix M and “this document,” which is the link to the ebook. 
Appendix M is a letter from Robert Bortins talking about the book. The title of the book is not mentioned, except if you click the little blue “this document” link you will see the book itself.

 

Please help out your fellow CC Directors and point them to the Directors Licensing Guide (which I believe is available online for licensed CC Directors) page 54, Appendix M and click on “this document.” 

 

Why can’t I get the ebook from Carol Topp, CPA, the author?
Unfortunately, I cannot distribute the ebook myself. My contract with Classical Conversations states that only CC may distribute the book. I am so sorry that it was not available sooner in this tax season and that it seems to be difficult for many of you to find.

 

What if I messed up my taxes?
If you read the ebook and believe you have made an error in filing your 2017 tax return, please consult a tax professional. If you prepared your tax return yourself, please contact a local tax professional to help you amend your tax return. It’s a confusing and complicated process to amend a tax return so I don’t recommend you doing it yourself. How to find a local tax professional

 

I hope that helps.
Again I apologize that the book was not available earlier in the tax season. It went through several reviews and edits and that delayed its release.

 

Carol Topp, CPA
Helping Homeschool Leaders and Organizations

Can homeschoolers use 529 plans? Maybe!

Congress decided to expand 529 savings plans to be used for K-12 expenses in the Tax Cut and Jobs Act or 2017. 529 plans were originally set up to save for college. The earnings on the savings is tax free. But they specifically excluded homeschool expenses from using 529 funds.

That seemed unfair to a lot of homeschoolers.

But there may be a way for homeschoolers to use their 529 savings accounts for some K-12 expenses.

The Tax Cut and Jobs Act or 2017 says this:

the term ‘qualified higher education expense’ shall include a reference to expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.”. (emphasis added)

There are 2 conditions for you to use 529 funds for K-12 expenses:

1) the costs must be for tuition and

2) the institution the family pays must be “a public, private, or religious school”

Some homeschool students take classes from private schools (locally or online). The tuition payments to these schools can use 529 funds.

But the cost of books, supplies, equipment, and payments to organizations that are not schools cannot use 529 funds.

Be careful that the tuition payments are going to a public, private, or religious school. In my experience most homeschool programs (co-ops, tutorials, etc) are NOT schools.

Homeschool parents should check with the program that they are paying tuition to to determine if it is a school according to their state’s definition.

If you have any concern about their status as a school, then do not use 529 funds to pay for the tuition. Withdrawals from a 529 fund that are not “qualified” (i.e. tuition paid to a public, private, or religious school) then you pay income tax and a penalty of 10% on the withdrawn funds. Ouch!

Carol Topp, CPA