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

San Antonio, Austin and Houston: Q&A with HomeschoolCPA this week

San Antonio, Austin and Houston, Texas will all be getting live Q&A time this week with Carol Topp, CPA, the Homeschool CPA!

San Antonio: Tuesday February 25, 2020
from 7:00 to 8:30 pm
on the lovely grounds of
Family Educators Alliance of South Texas (FEAST)
7735 Mockingbird Lane • San Antonio, TX • 78229
Register here for San Antonio

Austin: Wednesday February 26, 2020
from 6:30-9:15 pm
at
Calvary Worship Center (North Austin, close to TX 45 & N Mopac Expy)
14901 Burnet Road
Austin, TX 78728 
More information and to RSVP for Austin

Houston: Thursday February 27, 2020
from 6:30-9:15 pm
at
University Baptist Church  (Chapel area)
16106 Middlebrook Dr
Houston, TX 77059  
More information and to RSVP for Houston

Each event is free, but the organizers would appreciate you register so they have a head count.

The San Antonio event is sponsored by Family Educators Alliance of South Texas and the Austin and Houston events are sponsored by Texas Homeschool Coalition with much appreciation!


Each event will have:

  • A brief session presented by Carol Topp, CPA, the HomeschoolCPA on “Topp Tips for Running a Homeschool Organization”
  • A Town Hall session for you to ask question and get advice from other homeschool leaders
  • Q&A time with Carol Topp, CPA
  • Professional advice on finances, legal structures, taxes, employees, insurance, etc.
  • A chance to look at HomeschoolCPA’s books
  • An opportunity to be encouraged by other leaders who understand you!

I hope to see you in San Antonio, Austin or Houston!

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Set Up Homeschool Family as a Charity

Carol Topp, the Homeschool CPA is sometimes asked if a homeschool family can be a charity.  Sometimes a homeschool spouse wants to set up a business and hire their spouse to homeschool their children.

Can this be done?

Are there tax breaks for doing this?

R.A. writes, “I would like some preliminary information on setting up a 501(c)(7). I would like to set up my homeschool (my wife and 3 kids) up as a charitable organization. We have been homeschooling for 12 years.”

Here’s Carol’s reply to these situations on today’s episode of the Homeschool Leader podcast.

  • Can R.A. set up his family as a charitable organization?
  • What’s a 501c3?
  • What’s a 501c7?
  • What’s the difference between a 501c3 and a 501c7?
  • Why your family cannot be a nonprofit
  • Why you shouldn’t hire your spouse to homeschool your children.

In the podcast, Carol referenced a few sources from the IRS:

A nonprofit tax exempt organization must serve a public good, not the private interests of the founder or his family. The IRS is very clear on this point. https://www.irs.gov/charities-non-profits/charitable-organizations/exemption-requirements-section-501c3-organizations

501c7 Social clubs must be formed for exempt purposes. Serving only your family is not an exempt purpose. See: https://www.irs.gov/charities-non-profits/other-non-profits/social-clubs

Carol has a few blog posts on this idea:

Incorporate yourself and write off homeschool expenses

Can my family’s homeschool be a nonprofit?

Is my homeschool a nonprofit?

Featured Product

In the podcast I mentioned my book

The IRS and Your Homeschool Organization

Does your homeschool group need to pay taxes? Could they avoid paying taxes by being a 501c3 tax exempt organization? Do you know the pros and cons of 501c3 status? Do you know what 501c3 status could mean for your homeschool group?

I have the answers for you in my book The IRS and Your Homeschool Organization. The information I share in my book has been helpful to homeschool support groups, co-ops, music and sports groups and will help you understand:

  • The benefits of 501c3 status
  • The disadvantages too!
  • What it takes to make the IRS happy
  • What your state requires
  • Why your organization should consider becoming a nonprofit corporation
  • What is the difference between nonprofit incorporation and tax exemption
  • IRS requirements after you are tax exempt

The webinar Create a Nonprofit for Your Homeschool Community is also helpful.

Flowchart for Starting a Nonprofit

While helping a homeschool organization in Washington, I found a nice 44 page book from WA state on forming a nonprofit.

https://www.sos.wa.gov/_assets/charities/training/starting-a-nonprofit-pdf.pdf

I really liked the flowchart on page 5. It has steps to take at the State level, the Federal level, with people, planning milestones and operations milestones.
Many tasks can be some simultaneously. Some must come after another. The flowchart shows all that!

It’s a lot to digest, but it puts all the important steps in one flowchart!

I created a checklist to apply for 501c3 tax exempt status. It is sequential; it doesn’t show that many tasks can be simultaneous, but it should still be very helpful.

If you’d like helping starting a nonprofit or apply for 501c3 tax exempt status, my webinars will help !

I have several services to help homeschool groups apply for 501c3 status.

Or you can arrange a phone consultation with me.

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Where to get initial funding for a homeschool nonprofit start up?

A homeschool parent is launching a new homeschool program. Like many nonprofits, she needs some money to start up.

The main concern for our group at the moment are funds for filing (for nonprofit incorporation and 501c3 tax exempt status).

We have brained stormed and agreed on holding a spaghetti dinner fundraiser but we aren’t positive that this will bring the funds we are hoping for. Another idea is to present the exact cost to those members interested and see if they will be willing or able to divide the start up cost.

Sounds like you have an exciting adventure ahead of yourself by forming a  homeschool nonprofit!

You asked about initial funding. Many homeschool groups get their initial funding from donations (or loans) from the board members. You could also ask friends, family and potential members for donations.

Having a fundraiser or soliciting donations can be tricky because you need a bank account and to get that you need an EIN and you should get an EIN only AFTER you form a nonprofit corporation. But that’s what you need the funds for, so you’re caught in a Catch-22 cycle!

Additionally, some state require organizations to register before conducting a fund raiser or soliciting contributions from the general public. Here’s a source to see what your state requires: https://www.harborcompliance.com/information/nonprofit-compliance-guide

So it seems donations (or temporary loans) from the board members or potential members is your best option.

Helpful Resources

I have three podcast episodes  to explain starting a nonprofit or converting a homeschool business into a nonprofit organization. My podcast can be found at HomeschoolCPA.com/Podcast The episodes are:

  • Episode 168 Part 1 Nonprofit basics
  • Episode 169  Part 2 Nonprofit corporation
  • Episode 170  Part 3 Tax exempt application

Additionally, I have a webinar that goes into much more in-depth on starting a nonprofit organization. Unlike the podcasts which are free, the webinar costs $10.


Get details for Create a Nonprofit for Your Homeschool Community webinar at HomeschoolCPA.com/CreateNP

If you don’t want to be taxed on any surplus, then you’ll need nonprofit AND tax exempt 501c3 status for your new group. The webinar will explain that. 🙂

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

DIY 501c3 tax exempt status

In 2019 Carol Topp started an ambitious project. She set out to record 3 webinars to hep homeschool groups form a nonprofit and apply for 501vc3 status.

In this podcast she describes these 3 webinars.

Create a Nonprofit Organization for Your Homeschool Community

501c3 Application for Homeschool Nonprofits

IRS and State Filings for Homeschool Nonprofits

(click each title for details)

The 3-video set plus resources, ebooks, checklists, etc. sells for $50

This 3-webinar set is great for:

  • Brand new start up homeschool groups
  • Existing groups that never formed as a nonprofit
  • Existing groups that never applied for 501c3 tax exempt status
  • Homeschool communities run as a business that want to convert to be a nonprofit organization

Learn more about this 3-webinar set to apply for 501c3 tax exempt status.

New homeschool co-op wants simplicity. Any taxes due?

Hi Carol.
I started up a group of a few families last year as a homeschool co-op in our community. As we have grown a little more this year, I would like to start up a checking account.

My question is, after I get an EIN and open the checking account for the co-op, what is required at tax time, if anything, for having that account?

I don’t want to be recognized yet with the IRS as a 501c3, just for sake of simplicity at this time. Am I going to be required to do anything because of having this checking account?

We do not pay teachers, the account is strictly for fees and supply costs.

This semester we will only be taking in about $2,500 at max. and that is stretching it.

Thank you for your advice.
Callie


Callie,

I have answered your questions in some blog posts that you may find helpful:

Will getting an EIN put us on the IRS radar?

Best of: Checking accounts for homeschool organizations

We’re not 501c3 and don’t want to be!

The last blog post explains you have a few choices if you collect money and provide a service:

  1. Stay small and self declare 501c3 tax exempt status. This is the simplest option and the one I recommend for Callie’s organization.

    She will have to call the IRS once to self-declare her 501c3 status and get added to the IRS Exempt Organization database so the group can file their annual IRS Form 990-N.

  2. Consider another tax exempt status such as 501c7 social club. This is applicable to support groups or clubs, but not for Callie’s homeschool co-op.

  3. Apply for 501c3 status, especially if annual revenues exceed $5,000/year. I can help with that.

  4. Pay taxes as a for-profit business. That’s the least simple way to go! I don’t recommend it!


If you are starting or running a tiny homeschool program (usually less than $5,000 in income in a year), then you’ll benefit from my resources and podcast series for Tiny Homeschool Groups.

Tips for Starting a Tiny Homeschool Group


Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders