Any Tax Deductions for Homeschoolers This Year?

 

Are there any tax deductions for homeschoolers this year?

Carol Topp, CPA answered this question originally back in 2014, but the answer is still the same-even with the new tax laws passed in 2017. Additionally, Carol gives some details on college expenses that are tax deductible and tax advantaged college savings plans.

This is a repeat of a podcast episode aired in 2014. I (Carol) caught a nasty cold and sinus infection and couldn’t talk without coughing for several weeks. I hope you find the re-broadcast of this episode helpful!

 

In the podcast Carol mentioned these resources:

Home School Legal Defense Association has an explanation of some states’ tax breaks or credits:http://www.hslda.org/docs/nche/000010/200504150.asp

Ann Zeise of A to Z Home’s Cool has a great, detailed and lengthy post of tax write-offs for homeschoolers:
https://a2zhomeschooling.com/laws/homeschool_laws_legalities/tax_deductions_educational_writeoffs/

 

Carol Topp, CPA

 

Taxes for Classical Conversations Directors

Last tax year I was asked a lot of questions about taxes by Classical Conversations directors and tutors. Things like:

  • What tax form should I to use to report my income and expenses?
  • What expenses were tax deductible?
  • What tax forms do I need to give to my tutors?
  • How should tutors be paid?
  • How do I pay myself as a CC Director?

Fortunately, there is an ebook in the works to help CC Directors titled:

Taxes for Classical Conversions Directors

The ebook is available only to Licensed CC Directors from Classical Conversations, Inc

You can find the ebook here

 

I recommend the following blog posts:

CC Directors: Do not give yourself a 1099-MISC

Tax return for a Classical Conversations homeschool business

I’m a Classical Conversations Director. Do I have to file any forms with the IRS?

Understanding Taxes for a small homeschool business

Consult a local small business CPA. To find a local tax preparer I recommend two sources:

Both of these websites allow you to search for a local tax preparer who is knowledgeable about taxes for small sole proprietor businesses.

 

Carol Topp, CPA


Free Resource

In the ebook, I mention a bookkeeping spreadsheet for CC Directors. You can get the spreadsheet now (all it costs is your email!)

 


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How to Find a Local Tax Professional

I like local!

I try to support local businesses and frequently tell tax clients in other states or cities to use a local tax professional.

How do you find a local tax professional?

Here are some tips:

I am no longer accepting tax clients for individual tax preparation, but I can help you with :

  • Business consultations by phone, especially of you operate a homeschool business like Classical Conversations, etc.
  • Nonprofit consultations by phone, especially of you are a homeschool organization or local Cincinnati nonprofit.
  • Assistance with applying for 501(c)(3) tax exempt status, especially of you are a homeschool organization or local Cincinnati nonprofit.
  • Filing annual IRS Form 990/990-EZ for tax exempt organizations

Please contact me via email, tell me a little about your business or nonprofit, and what questions and issues you have. We’ll see if I can help you or if you need to go local.

 

Carol Topp, CPA

 

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

Is the rent our homeschool group pays to a church a donation?

Our homeschool co-op meets at a church, but they do not want to bill us for rent. The co-op gives a  gift/donation to the church as a thank you and so the church records it that way for their tax purposes.  Do we need to classify our “donation” to the churches as rent?
We have been informed by the church that this would affect their taxes and financial recordings since they are classifying our payment as a donation received. The last thing we want to do is cause problems for the churches sharing their space with us. Please advise/explain.
Kelly
Let me start off by saying that simply calling what you give to the church a “donation” is a simply renaming the payment. Calling your payment a donation does not change the fact that you are giving money to this church in exchange for use of its space. Even if they do not bill you, it is payment for use of space and not a donation. Be honest. Call it what it is in your records: rent. What the church wants to call it is up to them.
I’m not alone in my opinion about this. Attorney and CPA, Frank Sommerville, says

“Many churches try to disguise rents by using other terminology or by claiming that the other organization is simply giving a donation to the church. Other times the church calls it a “cleanup fee” or tells the tenant to pay the janitor directly for his services. None of these name games work. If any amount is paid by the other organization to the church or the church’s workers, then the IRS and state taxing authorities will likely treat it as rent paid to the church.”
Source: Frank Sommerville, JD, CPA https://www.wkpz.com/content/files/Use%20of%20Church%20Facilities%20by%20Outside%20Groups.pdf

But the church is worried about taxes, so let’s address that. The church is worried about two things:

  • IRS federal income tax exempt status as a 501(c)(3) religious organization
  • Local property tax exemption.

Let’s address each concern:

IRS federal income tax exemption.
The church has 501(c)(3) tax exempt status as a religious organization and probably also charitable and educational purposes as well. So long as they stick to religious, charitable, and educational activities their 501(c)(3) status is not in jeopardy.

But renting space is a commercial activity and not religious, charitable or educational. So the IRS considers income from renting space as “unrelated business income” and will charge an unrelated business income tax called UBIT on the profits from the rented space.

Fortunately, there are exceptions to UBIT. Three factors will determine whether the church would owe any UBIT on rental income (See IRS Pub 598 ) :

  1. Whether the group renting the church space helps the church fulfill its mission in some way. There is no UBIT if the tenant’s activities helps the church meet its mission. Your homeschool co-op, if religious in its purpose, helps the church accomplish its mission and the rent you pay would not be an unrelated source of income for the church.
  2. Whether the church is charging fair market value for the space. If they are charging above fair market value, there is a profit and therefore tax to pay.
  3. The church has a mortgage or other debt financing on the building (called debt-financed property by the IRS). If the building is debt financed property, the rental income is unrelated business income and therefore taxable.

If the church determines they have unrelated business income, they will have to file a Form 990-T to declare the unrelated business income. But they are also allowed to deduct any expenses related to the rental income such as utilities, custodian care, etc. Typically the expenses  outweigh the income and so no tax is owed. But the church needs to file the 990-T to prove that don’t owe any tax.
Thanks to http://www.corestrategies4nonprofits.com/nonprofit_core/Go_Ahead_-_Rent_Your_Extra_Space

Kelly’s homeschool group’s purpose (religious and educational) helps fulfill the church’s mission and does not threaten its 501(c)(3) status. The church, if it has a mortgage, may need to prepare a IRS Form 990-T and may (or may not) owe UBI tax on the rental income. So, in other words, it is the church’s mortgage that could cause UBIT, not the fact that Kelly’s group is paying rent to use their space.

Property tax exemption:
The church may be concerned about its property tax exemption from the state or county. In general if the tenant’s mission matches the church’s mission (religious, charitable and/or education), the church’s property tax exemption is not jeopardized.

BTW, if your homeschool group is not a nonprofit organization (meaning it is a for-profit business), using church property could endanger the property tax exemption of the church. The loss of property tax exemption can be in whole or in part; it depends on local and a state property tax exemption laws.

Kelly’s organization is a nonprofit with religious, charitable and educational purposes. It ‘s use of the church building does not threaten the church’s property tax exemption.

Conclusion:
Kelly could go back to the church and determine the basis for their concern. In all likelihood things will continue as usual with Kelly’s organization making a payment to the church as they see fit. I recommend that Kelly record this in her group’s bookkeeping as “rent.” How the church wishes to record it is ultimately up to them, but in my opinion (and other professionals’ opinions), it is not a donation; it is payment for use of space.

Hopefully the church will be honest to the government and prepare the Form 990-T, if required.  This is rendering to Caesar what belongs to Caesar (Matt 21:22). Whether or not the church will owe UBI tax on this money is dependent on if they have a mortgage on the building and the amount of expenses they have.

Carol Topp, CPA

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Used curriculum sales and taxes

When a homeschool group has a fund raiser like a used curriculum sale or mini-exhibit hall is the income taxable?
Thanks,
Dorothy
Dorothy,
Fundraisers are usually considered unrelated business income, meaning that the fundraiser activities are not related to your organization’s tax exempt purpose. In other words, a homeschool group’s purpose is education, not selling curriculum or hosting an exhibit hall.

 

Unrelated business income is taxable income. It’s called UBIT-unrelated business income tax.

 

From the IRS: Unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption. An exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T (and pay federal income tax).

 

Fortunately, the IRS has several exceptions to paying the UBIT tax:

  • A $1,000 threshold allows that the first $1,000 in gross revenues from an unrelated business will not be taxed.
  • If the fundraiser (or unrelated business) is run by volunteer efforts (i.e., no paid staff) then the proceeds are not taxed.
  • If the fundraiser is not regularly carried on, such as a once-a-year unsed curriculum sale, then the proceeds are not subject to UBIT.
  • If you are selling donated items, like in a garage sale, the income raised is not taxed.

One of these exceptions are bound to apply to most homeschool organizations.

So, while the income from an unrelated business activity may be taxable, in reality, no tax will be paid because one of the exceptions mentioned above applies.

 

Carol Topp, CPA

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IRS amnestry program for employers (how to avoid penalties for paying workers as Independent Contractors)

You may have heard about the IRS crackdown on misclassifying workers and the penalties that your business or homeschool program could face if  your business is audited by the Internal Revenue Service (IRS). For a true but sad story about the Landry Academy read this.

What can you do to avoid the IRS penalties?

The IRs has a program called the Voluntary Classification Settlement program (VCSP) .

Eva Rosenberg, the Tax Mama, explains the IRS Voluntary Classification Settlement Program in plain, clear English. Just the way your mama would talk to you.

The VCSP (aka the IRS amnesty program) allows employers to avoid the penalties for paying your workers as Independent Contractors when they should have been paid as employees.

IRS Amnesty Program? Yes There IS an Employer Amnesty Program

Eva explains,

For those employers who do apply for the VCSP, the savings can be substantial. For example, take a calculation based on unreported payroll of $625,000 in the prior year. Under the amnesty, the full payment to the IRS would be under $6,600. Without the amnesty, with the IRS looking back for only three years, it would cost the employer over $292,000 (for six years, over $620,000).

I can help you determine if the IRS amnesty program is a good option for your homeschool business or nonprofit organization. Contact me and we can talk about your options.

One homeschool group leader decided to apply for the IRS amnesty program and convert her tutors to employees. She said, “For $145 (her fee to the IRS), I can sleep better at night knowing the IRS won’t audit me or make me pay a penalty.”

Carol Topp, CPA

Helping homeschool leaders

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How can I thank my volunteers?

 

It’s the end of your homeschool organization’s school year and you want to thank your volunteers. They work so hard, so you hand out generous gift cards as thank you gifts. You may have just created a tax liability for your volunteers! Carol Topp, CPA, the Homeschool CPA discusses ways to thank your volunteers that are tax-free.

Listen to the podcast

 

Do you have more questions about volunteers and paying workers? I spent at lot of time doing research so that homeschool leaders will know if they are paying their volunteers, board members, and workers legally and correctly. It’s all in this new book:

payingworkerscoveroutlined

Paying Workers in a Homeschool Organization-2nd edition

$9.95 paperback
130 pages
Copyright 2017
ISBN 978-0-9909579-3-5

BuyPaperbackButton

 

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Understanding Taxes for a small homeschool business

It’s tax season and I’ve been getting several emails from homeschool business owners, especially Classical Conversations directors, about how to fill out their tax returns.

The IRS has a terrific website called Understanding Taxes that explains how to fill out a simple business tax return.

It’s quite good. I’ve used their simulations when I taught personal finance at my homeschool co-op

Visit these websites to learn how to fill out your Schedule C Business Income and Loss.

Understanding Taxes home page

Simulation of filing a simple business tax return using Schedule C-EZ

Simulation of filing a simple business tax return with a 1099-MISC (this simulation would be helpful for a Classical Conversation tutor who receives a 1099-MISC).

 

You could also try searching Youtube for helpful videos on preparing a business tax return. Here’s one I found:
How to Fill Out Schedule C for Business Taxes He goes over the Schedule C line by line in about 20 minutes.

 

I hope that helps,

Carol Topp, CPA

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Tax return for a Classical Conversations homeschool business

We are a new Classical Conversations community set up as a single member LLC. We only had 2 students and so my tutor’s income was below the requirement for filing 1099s. Same for me. However, I saw that I shouldn’t be filing a 1099-MISC for myself. What should I be doing?

And what is considered profit for a CC community?

Esther

 

Thank you for emailing me your question about taxes and your Classical Conversations (CC) business.

As a single member LLC, you are a sole proprietorship and you report your income and expenses from your CC business on a Schedule C Profit or Loss from Business as part of your Form 1040.

All your income from the tuition and fees charged to your customers (i.e. parents) goes on line 1 Gross receipts or sales. In this example the total income is $4,500.

Your payment to your teacher(s) goes on Line 11 Contract Labor.  In this example a total of $2,250 was paid to independent contractors. Other expenses go in the categories listed in Part II of the Schedule C. Other expenses made the total expenses sum to $2,982 as shown on Line 28.

The profit is shown on Line 31. It is calculated  from Gross Income (Line 7 on the form) minus Expenses (Line 28). The profit is what you get to keep (and pay taxes on!) as the business owner. In this example the profit is $1,518. This amount will carried forward to the first page of the Form 1040 to Line 12 Business income or loss.

This Youtube video may help: https://youtu.be/qd5etmtyn9s It’s not specific to homeschooling businesses or Classical Conversations, but it goes over the Schedule C line-by-line in about 20 minutes.

P.S. I am no longer taxing new tax clients, so I recommend you find a local CPA to help you in preparing your tax return. To find a local CPA or accountant I recommend you try Dave Ramsey’s Endorsed Local Providers and Quickbooks Proadvisors. A lot of CPAs and accountants listed on these sites specialize in small businesses.

Carol Topp, CPA
HomeschoolCPA.com
Helping homeschool leaders

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