Homeschool groups and huge fundraisers can be a bad thing!

Hey Carol –

I have been perusing your site as we are getting ready to start a new homeschool group (breaking off a larger group) in our area. Based on the info I have read, I feel that we identify the most as a 501c7 social group.

We will be offering clubs, fellowship, and field trips as our primary purpose. As a larger homeschool group, we have sold Discount Cards with local businesses/restaurants giving certain discounts to patrons. We sold them for $5 each. This has been a huge fundraiser for the bigger group. One box of cards is $5,000 (not all profit as there is expense from the printing).

My question is if as a new group we could sell these to help with our expenses and if the UBI would be taxable? We definitely want to do things correctly. The sellers would be the members of the group and done voluntarily.

I appreciate any help you can provide. Thanks!

Joyell

Joyell,
Your organization avoids the UBIT tax because the fundraiser is conducted substantially (or in your case, completely) by volunteers.

But you need to be careful that at least 65% of your total income comes from membership dues. Therefore, a maximum of 35% your income can come from fundraisers. Note that this is income, not the net proceeds of your fundraiser.

Something like this:

Your group’s total income = $10,000

Membership dues (this can include field trip income) must be $6,5000 or more (at least 65% of total income)
Fundraiser income cannot be more than $3,500 (max of 35% of total income)

One of the problems with this type of fundraiser is that it brings in so much income (and of course has substantial expenses as well), it can that it can jeopardize your 501(c)(7) tax exempt status because the fundraiser income exceeds 35% of total income.

This may mean that you are no longer tax exempt and will owe taxes on your surplus each year.

IOW, the IRS requires 501(c)(7) social clubs organizations to get most of their funds from members and not from selling products or other fundraisers.

I hope that helps.

Carol Topp CPA

Will a nonprofit owe taxes on income from selling ads?

GirlThrowsMoney
We considering including advertising in our conference brochure. Can we consider this conference (exhibitor) income? Or is it UBI (Unrelated Business Income)?
We are also considering placing advertising in our magazine (and our website). Is this UBI? And how do we track it? And how do we report it? And what percent taxes would we pay on it?
Dorothy in OR
Dear Dorothy,
Advertising revenue is definitely Unrelated Business Income (UBIT) in the eyes of the IRS, because selling ads is not related to your tax exempt purpose (education), but you can avoid paying taxes on the unrelated business income in several ways.

The IRS offers several exceptions to UBI Tax (UBIT):

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

I think #1 or #2 will apply to your group, so can get income from advertising without worrying about paying tax on it.

It’s a good idea to create a line item in your record keeping labeled “Advertising Income” so it’s clearly differentiated from other income.

Carol Topp, CPA

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

Will being an Amazon affiliate cause tax problems for a homeschool group?

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I have a question about affiliate relationships with companies like Amazon. We want to receive the benefits offered by Amazon (and others) by placing a link on our website for members and non members to use when ordering products.

I read through one article on your blog regarding Unrelated Business Income Tax (UBIT). One point in your article refers to exemptions for the tax and I believe we will qualify for at least two:

  • A $1,000 threshold allows that the first $1,000 in profit 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.

Do you have anything to add to that article or any others I haven’t seen?  Specifically, should we avoid these types of programs?

I appreciate your insight as well as your being a resource to the homeschool community.

Sincerely,

Jeanne R

 

Jeanne,

Thank you for contacting me and your kind words.

I think you understand Unrelated Business Income Tax (UBIT) and the exemptions quite well.

UBIT is a tax that tax exempt organizations must pay when they earn a profit on activities that are unrelated to their tax exempt purpose. The classic example is that a nonprofit hospital must pay the IRS taxes on profit from their gift store, because running a gift store is not related to the hospitals tax exempt purpose (treating illness).

Most charities qualify for exemption from UBIT and you found two common exemptions.

I think the affiliate program with Amazon is a fine idea.

Have it run by volunteers and you’ll avoid any UBIT.

Carol Topp, CPA

What is Unrelated Business Income Tax?

DollarCloseUp

Sometimes a homeschool group brings in a lot of money from fund raising. These efforts are so successful you may wonder if your group owes anything to the government in taxes. For the most part, fund raising is not considered part of your group’s mission; it is just a means to the end. After all, your group’s mission is to encourage homeschooling, not to sell ads, pizza or other products.

The Internal Revenue Service calls the money you raise “Unrelated Business Income,” meaning it is money collected in a trade or business that is not related to your primary mission. The IRS assess a tax on unrelated business income called the Unrelated Business Income Tax or UBIT. The purpose of this tax is to prevent nonprofit, tax-exempt organizations from having an unfair advantage over the for-profit marketplace.

The best example of unrelated business income is a gift shop in a nonprofit hospital. The income from a gift shop is not related to the hospital’s primary purpose of giving medical treatment, so the profits from the gift shop are taxed.

Your homeschool organization could have unrelated business income if you sell T-shirts, candy bars, entertainment books, candles, pizza coupons and a host of other products or if you make money from ads or Amazon commissions on your website.

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

  • A $1,000 threshold allows that the first $1,000 in profit 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 spaghetti supper, 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.

The rules regarding UBIT are complex. You can read more about UBIT in IRS Publication 598 Tax on Unrelated Business Income of Exempt Organizations (http://www.irs.gov/pub/irs-pdf/p598.pdf).

Carol Topp, CPA