Convert your homeschool group to a nonprofit corporation and keep your EIN!

We started as a homeschool group in 1998. I don’t think any bylaws or articles of incorporation were ever filed. So we were just an unincorporated association, as I leaned from reading your books. We are now adding classes to our program and want to move through the process of filing to be tax exempt as a 501c3. We will file Articles of Incorporation to re-form as a nonprofit corporation.

Should I file for a new EIN or just use the current one?

Lisa in California

Lisa,

Lisa’s homeschool group was an unincorporated nonprofit organization that now wants the benefits of limited liability for her members and board that nonprofit incorporation offers.

For years I told small homeschool groups:


“If you decide to incorporate as a nonprofit corporation in your state, then you must get a new Employer Identification Number (EIN) because you have formed a new, legal entity. It’s like a new baby was born and that new baby needs a new Social Security Number.

But now the IRS lets nonprofit organizations keep their EIN if they are just converting from an unincorporated association to a nonprofit corporation and not changing their “business structure,” meaning you were operating as a nonprofit organization (with a board, bylaws and a nonprofit purpose) and will continue to do so.

To use my baby and Social Security Number analogy: it’s like Lisa’s baby decided to grow up. It looks different now, but it is the same child and can keep its original Social Security Number. Lisa’s homeschool group “grew up,” but is still the same organization. It can convert to a nonprofit corporation and still keep it’s original EIN with the IRS.

The IRS website says:

“You will not be required to obtain a new EIN if any of the following statements are true….
Conversion at the state level (to be a corporation) with business structure remaining unchanged.”

Source: IRS.gov Do you need a new EIN.

So, you don’t need a new EIN if your unincorporated association converts to be a nonprofit corporation! That’s saves a lot of hassle!

But if your homeschool group is a for-profit business, owned by someone, like a Classical Conversations Community owned by the CC Director, then the business structure has changed and you’ll need a new EIN for the new nonprofit corporation.


My book The IRS and Your Homeschool Organization: Tax exempt Status for Homeschool Organizations will be very helpful as you apply for 501c3 tax exempt status.

If you have questions about nonprofit incorporation, 501c3 tax exempt status, or running your homeschool group, contact me.

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Paying a homeschool leader to start business and benefit the homeschool group

We are a new unincorporated nonprofit association and our Director has applied to become a notary. Can we use our fundraising funds to cover the cost for her to become a notary?

She would be offering complimentary notary services to all our members. We would charging a fee for notary services for people who are not members of our homeschool group. What are the legal ramifications for this?

Thank you for your time and assistance!

TA in Illinois

Dear TA,

Thank you for contacting me.

Your homeschool group should not pay for the Director to become a notary. That’s like your homeschool group paying for someone to attend medical school if they promise to give free physical exams to all members. No! Okay, that’s an extreme example, but you get the idea. 🙂

Your homeschool organization’s purpose is educational, not to fund someone’s business.

Becoming a notary is a business expense for an individual and your nonprofit should not be paying personal, business expenses for an individual.

The IRS could see this as “inurement” which is when the assets of a nonprofit (the money from fundraising) flows to benefit an individual. Sometimes it’s better called “private benefit” or “self-dealing.” Inurement is strictly forbidden by the IRS and could cause your organization to lose its tax exempt status. That’s a pretty serious legal ramification!

Don’t pay for the leader’s personal expenses to become a notary with the nonprofit’s funds.

Additionally, making money by charging nonmembers for services that are not related to your purpose (education) is called Unrelated Business Income and is subject to income tax. So that’s a financial ramification on your Director’s idea.

I discuss unrelated business income and the tax here: What is Unrelated Business Income Tax?

And in this podcast episode:
What is Unrelated Business Income Tax or UBIT? (podcast)

I hope that helps!

Carol Topp, CPA
HomeschoolCPA.com
Helping homeschool leaders

Does my homeschool group have to be tax exempt?

Does my homeschool groups have to be tax exempt? It seems like a lot of work, cost and government intervention.

Many of our members and the board members don’t want to be a 501c3. Do we have to be? We just want to keep things simple.

-Homeschool leader

Dear homeschool leader,

No, your homeschool group doesn’t have to be tax exempt, but then it will owe taxes on any surplus it has each year. I understand the desire to keep things simple, but, trust me, filing a corporate tax return (Form 1120) tax return is NOT simple!

It’s also not as much work to apply for 501c3 tax exempt status you you are fearing, especially of your organization is small (revenues less than $50,000/year) and is eligible to file the shorter IRS Form 1023-EZ.

Here’s an explanation from my webinar on 501c3 Application for Homeschool Nonprofits


This webinar (90 minutes total length) will explain the benefits of tax exempt status, the application process and walk you through the application Form 1023-EZ line-by-line. At the end of the webinar you’ll be equipped to apply for tax exempt status by yourself.

Get more information on the webinar 501c3 Application for Homeschool Nonprofits

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Seeking a homeschool group needing 501c3 status

A classical homeschool program in California no longer needs its 501c3 tax exempt designation and is willing to transition it to another homeschool organization. Isn’t that marvelous?

The organization will be operating as a ministry of a local church and no longer operate as a separate entity. Rather than waste all the time and effort going into establishing a nonprofit corporation and applying for 501c3 tax exempt status, they are willing to transfer its tax exempt status to another homeschool program. How generous!

To be eligible to receive the nonprofit corporate and 501c3 status your program must:

  • Be located in California
  • Be a homeschool organization, preferably a classical education program
  • Be a religious organization (Christian)
  • Be a new organization without an EIN (Employer Identification Number)
  • Not be incorporated as a Nonprofit corporation in any state
  • Must have a board of at least three unrelated people ready to file paperwork and launch a homeschool program

The recipient will get:

  • Nonprofit incorporation in California as a religious corporation with a specific purpose to provide a classical, Christian, home-centered education.
  • An Employer Identification Number (EIN)
  • 501c3 tax exempt status
  • Bylaws
  • Help with the transition paperwork from a current member of the board.
  • (Optional) Phone consultation with HomeschoolCPA Carol Topp, CPA and a board member to explain the transition and future filing requirements with the IRS and California. An hourly consultation fee of $85/hour payable to HomeschoolCPA Carol Topp, CPA applies.

These benefits would typically cost $300-$600 and several months of time. Being given this is a huge blessing to the right organization, saving time and money!

After the transition occurs, the new leaders can:

  • change the bylaws
  • add new board members
  • change the organization’s name to something else.

The new leaders MUST be willing to do several things including:

  • Agree to let one of the current board members remain on the board until all the transition paperwork is complete.
  • File the IRS Form 990/990-EZ/990-N  and all required California filings annually
  • Change the EIN’s Responsible Party name and address with the IRS
  • Change the California Agent for Service
  • Change the mailing address with the IRS and California

Is your group interested in this opportunity?

If so contact the board member liaison at cahomeschoolnonprofit@gmail.com.

Tell your story, your dreams for your homeschool program, something about your leaders, and why your program should be chosen.

Carol Topp, CPA

HomeschoolCPA.com

Helping homeschool leaders

Can a homeschool group be charitable? Maybe not!

I love knowing that  most homeschool groups are generous, especially toward families in financial need. They deliver meals, take up collections, and waive fees for a needy family.

But should a homeschool group serve as a charity?

Maybe, but maybe not.

Here’s a true story..

A homeschool group was given $5,000 with the specific purpose of gifting to members in the group that were experiencing difficult financial times.  They told me, “Our instructions from the donor was to gift it to members that were going through difficult financial times due to unemployment or illness.”

It was very nice of the donor and the organization to have a concern for the afflicted families in their program.

But this homeschool group has 501(c)(3) status as a religious and educational organization. There is no mention of “charitable” purpose in their founding documents (their Articles of Incorporation), or in their tax exempt application with the IRS.

Basically, they were not given tax exempt status to be collecting and distributing funds to needy people (i.e. charity).

Here’s part of what I wrote to them:

In general, your homeschool organization should not serve as a charitable conduit for someone to make a gift to a needy family (or families). The reason is because your 501(c)(3) status was for educational purposes, not charitable to help needy families with financial needs. Additionally, the donor used your homeschool organization to get a tax deductible donation, when he or she should have given the money as a gift (i.e. not tax deductible) to the needy families.

If you told me that you used the $5,000 to start a benevolent fund and reduced the tuition for several families, I’d say the IRS may approve that use of the money. Your homeschool organization is not a “charity” and should not be used to funnel money to a needy family, nor should you let your 501(c)(3) status be used to give a donor a tax deduction for what is a gift to an individual(s).

You were given tax exempt status for specific purposes. Stick to the purposes you told the IRS: educational and religious.

Now, I’m a religious person (a Christian, to be exact), so to me being generous and helping the needy is related my religious beliefs and this homeschool group may argue the same. But they should have been more clear in their explanation to the IRS and their organizing documents.

My advice to them is to:

  1. Not accept donations that are ear marked for helping the financial needs of a family. Direct the donor to other charitable organizations.
  2. Not give cash or checks to a needy family, but instead offer tuition discounts on their program to keep in line with their educational purposes.
  3. Not let your homeschool organization be used as a conduit for financial transactions that are outside of your exempt purpose.

All homeschool leaders should pull out their founding documents (their Articles of Incorporation and bylaws) and their tax exempt application with the IRS (Form 1023 or 1023-EZ) to refresh their memory on their organization’s stated purpose.

Then stick to that purpose.

The Homeschool Organization Board Manual will help you keep your important documents  in a binder for easy access.

Your board may wish to create a donation acceptance policy and include the 3 points above.

Carol Topp, CPA
HomeschoolCPA.com

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Does a homeschool support group have to apply for IRS tax exempt status?

Our homeschool group was founded a few years ago with the mission of providing support for local homeschoolers. Since then the membership and monies have grown that we needed to establish a bank account.

The bank informed me that our group needed to apply for an EIN number online through the IRS which I did.  However, I found out that we need to file additional paperwork e.g. Form 1024 as a 501(c)7 nonprofit.

We are not a large group and don’t want to apply for a Nonprofit Corporation or 501(c)3 status.  We just want to open an account to deposit monies from membership dues and recently held a rummage sale that all our members donated items to be sold.  We don’t sell services or have paid employees. The monies go to website fees and events that our homeschool members participate in.

Tom

Tom,

From your description of your homeschool support group, it sounds as if you fit the IRS definition of a 501(c)(7) Social Club.

Here’s a blog post about what it takes to be classified as a 501(c)(7) social club
https://homeschoolcpa.com/are-homeschool-support-groups-automatically-tax-exempt/

501(c)(7) Social Clubs can “self proclaim” their tax exempt status and you do not have to file the Form 1024.

Here’s a blog post I wrote on the subject:
https://homeschoolcpa.com/can-a-homeschool-group-self-declare-501c7-social-club-status/

Be sure to maintain your tax exempt status too!

Be aware that while a 501(c)(7) Social Clubs can “self proclaim” their tax exempt status and not file the official IRS paperwork, social clubs must maintain their tax exempt status by filing the IRS Annual Information ePostcard, Form 990-N.

Since you didn’t apply for tax exempt using the IRS Form 1024, you’re not in the IRS database and cannot file the Form 990-Ns. So you need to call the IRS Customer Account Services at 1-877-829-5500 and be added to their database so you can begin filing the Form 990-Ns.

When you call the IRS, say something like this,

“We’re a 501c7 Social Club and my CPA said I needed to get added to the IRS exempt organization database, so we could start filing the 990-Ns.”

This blog post has a few more tips. How to get added to the IRS database and file the Form 990N

Learn more about getting tax exempt status

Tom’s organization wants tax exempt status as a 501(c)(7) social club, but more homeschool groups are eligible for 501(c)(3) status as educational organizations especially if they conduct classes for homeschool students.

For more information on applying for 501c3 tax exempt status as an educational organization check out HomeschoolCPA’s webinars. There’s one specifically on the IRS application Form 1023-EZ.

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

The IRS Says Our Homeschool Group is a Private Foundation. Is that Correct?

Carol,
I am wondering if we can get some clarification from you. I am looking through this IRS document we received after we reapplied for 501c3 tax exempt status per your direction back in January.

It says we have been determined to be a 501(c)(3) private foundation and are required to file a 990-PF.

I feel like this information is incorrect, am I right in thinking this? 

Thank you,
Ashley


Ashley,

Oh dear. This is very unfortunate.

I guess that whoever filled out the 1023-EZ checked the box saying your homeschool group was a private foundation rather than a public charity.

Almost all homeschool organizations are public charities not private foundations.

What’s a private foundation?

Private foundations are funded by an individual, family, or a corporation, like the Bill and Melinda Gates Foundation or the Ford Foundation.These individuals and corporations typically make large donations to the foundation. The foundation invests the donations. The goal of the foundation is to distribute the income from their investments to charitable works like universities or medical research.

So what’s a public charity?

On the other hand public charities are funded by the general public through donations, membership fees, or activities related to their exempt function.

Most homeschool organization receive their funds from membership fees, tuition, field trip fees, and class fees. They are not private foundations.

Almost all homeschool programs are public charities.

Why does it matter?

There are several reasons why being classified as a public charity rather than a private foundation is important:

  • Private foundations must distribute their income from their investments every year or pay taxes. In addition, private foundations must pay an excise tax on net investment income.
  • The annual report for a private foundation is the complex, multi-page form called the 990-PF. It will take a CPA to help you prepare this beast of a form. But small public charities can file the IRS Form 990-N electronically every year by themselves!
  • Dissolving a private foundation involves either paying an IRS fee or distributing the funds to another established private foundation. it’s complex to dissolve a private foundation and will probably require an attorney and a CPA.
  • Private foundations must to make public their list of contributors; pubic charities do not have to make their donor list public.
  • Private foundations are highly regulated by the Tax Code and subject to a host of technical rules and restrictions that do not apply to public charities.

The cause of the mistake

Here’s a snapshot of the Form 1023-EZ application for 501c3 status where a homeschool organization tells the IRS how it receives its funding.

The homeschool program that emailed me checked the wrong box on the Form 1023-EZ and said they were a private foundation when they are not.

How to avoid this mistake

This mistake could have been avoided.

I offered my services to help this homeschool group with the Form 1023-EZ While my fee is $300, I also pointed the leaders to a $25 webinar where I go though the Form 1023-EZ line-by-line and I explain the difference between public charity and private foundation.

This homeschool group never purchased my services or even my webinar, thinking they could save time and money. 🙁


The webinar on 501c3 Application for Homeschool Nonprofits costs only $25. In addition to the 90 minute webinar, you get a copy of my ebook The IRS and Your Homeschool Organization.


How to fix the mistake

To request the IRS change the status of Ashley’s homeschool program from private foundation to public charity, it must file IRS Form 8940. The form looks easy, but it is all the supporting documents and the explanation to the IRS that are the quite complex and burdensome.

Ashley will need to give the IRS a lot more documentation including bylaws and financial statements than she did when filling the Form 1023-EZ application.

I will charge Ashley’s organization $200 to request a change to public charity with the IRS on Form 8940. The IRS fee is an additional $500.

So a $700 expense could have been avoid by paying $25 and watching my webinar!

Don’t make the same mistake!

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

IRS Makes It Easier to Convert to a Nonprofit Corporation

For years I told small homeschool groups:

“If you never incorporated as a nonprofit corporation in your state, then by default, your organization is an unincorporated association.”

And I also told them that,

Unincorporated associations CAN apply for 501 tax exempt status,

BUT

If your association someday decides to incorporate, you have to reapply for 501 tax exempt status.

So it might be a good idea to just become a nonprofit corporation from the start.


That was good advice because nonprofit corporate status has many advantages over unincorporated associations:

  • Limited liability for leaders and members
  • Longevity beyond the current leadership
  • A legal entity that can buy property, lease space, etc.

But the IRS realized that sometimes tax exempt associations want the benefits of being a nonprofit corporation. The IRS was telling them they needed to reapply for 501c3 status, although nothing else changed!

This reapplication process (filing the IRS dreaded Form 1023, paying a $600 fee, and waiting 6 months for the IRS to reply) was termed “burdensome” by the IRS. Finally!

So the IRS wised up and in 2018 created a document called Revenue Procedure 2018-15 which says (basically):

A domestic, exempt nonprofit association (in good standing) that restructures into a nonprofit corporation does not have to reapply for 501 tax exempt status

But there are a few conditions that need to be met:

  1. Domestic (meaning formed in the United States not a foreign country)
  2. Exempt meaning the association was already tax exempt by the IRS and has maintaining it tax exempt status by filing the annual Form 990/990-EZ or 990-N.
  3. Good standing in their state
  4. Have the IRS required language in their organizing documents (Articles of Association, Constitution, or bylaws)
  5. Not be an LLC or a partnership

Here’s an example that might apply to your homeschool group:

A homeschool support group formed in Ohio (#1 domestic) applied for and was granted 501c3 tax exempt status (#2 exempt) as an educational organization. They filed all required reports with Ohio’s Secretary of State (#3 Good standing). Their Constitution had the IRS required language about their 501c3 purpose, prohibitions, and dissolution (#4).

Then the support group grew larger started adding sports programs and a co-op. The leaders learned about the benefits of limited liability if they were restructured as a nonprofit corporation. They voted to convert to a nonporift corporation and filed Articles of Incorporation in Ohio.

Under the old rules this homeschool group would have to re-apply for 501c3 status with the IRS by filing Form 1023 (what I call the beast), pay the IRS $600 and probably pay a professional to prepare their application.

Under the new IRS Rev Proc 2018-15, there is no need to reapply. That saves $600 or more! Plus a lot of time!

All the IRS asks is that your file your annual information return, Form 990 or 990-EZ, and explain the restructuring and attach the new Articles of Incorporation. That’s it!


Additionally, you can keep the original EIN. The IRS website says:

“You will not be required to obtain a new EIN if any of the following statements are true….
Conversion at the state level (to be a corporation) with business structure remaining unchanged.”

Source Do you need a new EIN.

So, no you don’t need a new EIN! That’s saves a lot of hassle as well!


If you have questions about nonporift incorporation, 501c3 tax exempt status or running your homeschool group, contact me.

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Help a New Homeschool Group Start Up Quickly

Homeschooling is exploding in light of the COVID-19 pandemic and existing homeschool groups cannot accommodate all the newcomers.
But homeschool leaders want newbie homeschoolers to be successful and have support, so what’s to be done?

How about your existing homeschool group help start another homeschool group? It can be pretty easy. It’s called a “fiscal sponsorship” arrangement Here’s how it would work:

Step One:

Read up on a concept called “fiscal sponsorship.”
These blog posts will get you started:

Step Two:

Meet (online via Zoom) with the leaders of the new group. Explain the arrangement. The new group will exist as a “program” or a committee running the program under your existing homeschool organization.

The new program or committee leaders will get:

  • Use of the parent organization’s EIN (employer Identification Number)
  • Use of the parent organization’s nonprofit incorporation status. This means the new group does not have to form a new nonprofit entity
  • Use of the parent organization’s bank account. The parent organization may want to set up a new checking account for the new group with its existing EIN. Make sure the treasurer has online access to the new checking acocunt.
  • Use of the parent organization’s 501c3 tax exempt status. This is a HUGE advantage. The new group won’t have to apply to the IRS to grant tax exempt status. They can be up and running immediately!
  • Use of the parent organization’s bylaws. The new group will be under the parent organization’s bylaws as a new program, so the new group doesn’t need its own bylaws.
  • Use of the parent organization’s Policy Manuals, registration forms, etc.
  • Use of the parent organization’s website, Facebook account, and other online services for registration.
  • Coverage under the parent organization’s insurance policy. Another HUGE advantage. The parent organization should call its insurance provider and explain it is expanding. Ask for a new quote on what the increased cost will be. Make sure the new group pays the parent organization for their share of the insurance.

The new group will need to:

  • Set up a committee of at least 3 people to operate the new program. One of the parent group’s board members should be invited to all committee meetings to offer help and advice. She should report back to the parent organization on how the new program run by the committee is doing.
  • Find a location to hold their program, meet-ups, classes, etc.
  • Pay the parent organization their share of the insurance
  • Give financial reports to the parent organization at least every 3 months, although monthly is recommended.
  • Make 2-3 year plan for launching itself to be an independent organization.

Agreement in writing

I strongly recommend a written agreement signed by the Chair of the parent organization and the new program committee chair.

The agreement should outline the bullet points given above and add any other issues you think of.

If you want examples of agreements, you could look at some fiscal sponsorship samples
or read

Fiscal Sponsorship: 6 Ways to Do It Right by Gregory Colvin. It describes six models of sponsorship that have been approved and accepted by the IRS. It details how the models work and why, how they differ and how they are similar.

Summary of the book and its six models of fiscal sponsorship by the author: Fiscal Sponsorship: 6 Ways to Do It Right synopsis Colvin.pdf

Advantages

The advantage of this idea is that your group can help start a new group as a program and there is very little you need to do except offer advice! The new group will have the advantage of being able to focus on starting their activities and not have to worry about paperwork, setting up a bank account, government filings, etc. The parent group has already done all that!

This comparison chart of starting a new organization or creating a committee as a fiscal sponsorship under an existing nonprofit was created by attorney Gregory Colvin. It shows how fast a committee can get started on running a new program.

It can work!

This idea is really something new and existing homeschool groups could do together to help new homeschoolers learn from the experienced ones!

If you have more questions about fiscal sponsorship or starting a new homeschool group, I am happy to set up a phone consultation. Contact me and we can discuss what questions you have!

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Can my CC group become a nonprofit and use the Form 1023-EZ?

I have been a director of a homeschool educational group (Classical Conversations) as an individual DBA. I have been paid but the money goes back into paying others for my kids’ education and materials for the group – generally no profit. It is not an LLC or corporation. Can I incorporate in the state and file the IRS Form 1023-EZ form?
Jodi

Jodi,
Even though your CC business was not profitable, it was still a business. Having no profit does not make your business a properly formed nonprofit organization. To be a legitimate nonprofit organization you need a board, bylaws, and nonprofit mission.

By the way, your children’s tuition and homeschool expenses are not a business deduction on your tax return. So you may have been profitable from a tax perspective after all. See my ebook Taxes for Homeschool Business Owners for details on what are tax deductible expenses.

Therefore, you can convert your business to a nonprofit organization, but you will not be able to use the shorter, online IRS Form 1023-EZ to apply for 501c3 tax exempt status.

The Form 1023-EZ specifically asks if the nonprofit organization is a “successor to a for-profit business.” The newly formed nonprofit would be a successor to your business because most of the assets or activities are taken over by the nonprofit.

So you must file the IRS full version Form 1023 to receive tax exempt status for the newly formed nonprofit organization. The IRS will request an explanation of your prior business and how the nonprofit is different from the business on Schedule G Successors to Other Organizations.

I addressed this specific situation in my first webinar of this series on Create a Nonprofit for Your Homeschool Community. You might find it very helpful to decide if you want your CC Community to convert to a nonprofit. I discuss the difference in mindset, setting up a board, and more.

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders