How the IRS sees homeschool groups (podcast)

IRS and homeschool groups

UPDATE: This podcast episode originally aired in 2015. But it is still accurate and helpful in 2021, 6 years later!

In this episode of the Dollars and Sense Show podcast, host Carol Topp continues her topic “Who’s Afraid of the IRS?” and discusses how the IRS sees homeschool co-ops, nonprofit incorporation, for-profit homeschool groups, and what happen when a nonporift loses its 501(c)(3) tax exempt status.

Listen to the podcast

Listen to the first part of this presentation where Carol discussed homeschool support groups as IRS 501(c)(7) Social Clubs and co-ops as 501c3 Educational organizations.

Get a copy of the handout.

More information

Carol mentioned the article “Do You Know About IRS Required Filings for Homeschool Organizations?” Get it here.

Carol’s book, The IRS and Your Homeschool Organization, is available here.

The IRS and Your Homeschool Organization

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Do Articles of Incorporation have to be submitted if we’re not a nonprofit/501c3?

We are a group of families that came together last year to work collectively in sharing the role of teaching each other’s children one day a week. We have lots of interested families that want to join us next year. I’m thinking Co-Op is the way to go, but I’m still not sure of the road ahead. We have 5 Board members and are working on Bylaws now.

The Articles of Incorporation are not clear to me. Do they have to be submitted outside the Co-Op if we are not Non-Profit/501c3?

As soon as you have a board, mission, and bylaws your organization IS a nonprofit organization! Congratulations! It is an unincorporated association, but it is still a nonprofit organization.

Filing to be a nonprofit corporation in your state is another, more formal step that I highly recommend to homeschool co-ops (who are high risk operations) for all its benefits, mainly limited liability for your board and all members. Unincorporated associations have no such liability protection for their members or leaders.

These articles from my website should help:
Do we need to Incorporate?

5 Great Reasons to Incorporate

Like many people, you are mixing the concepts of nonprofit status and tax exempt status. It can be confusing! This short video should help: Is my homeschool group a nonprofit? short video





To be clear:

  • unincorporated association status and nonprofit corporate status are defined and granted at the state level. They are legal entities.
  • 501c3 is a tax status granted by the IRS to qualified unincorporated associations and nonprofit corporations.
  • The co-op is a program operated by the unincorporated association or nonprofit corporation.

So when you ask, “do they (Articles of Incorporation) have to be submitted outside the Co-Op if we are not Non-Profit/501c3,” it would really better be asked like this:

“When should the nonprofit organization we just started consider filing Articles of Incorporation? We run a high risk program: a homeschool co-op with lots of children and families and are worried about potential liabilities. We also want to know the advantages of 501c3 tax exempt status for our nonprofit organization.”

See the difference the word choice makes? Words are important and using the correct terminology helps you understand these confusing concepts. 🙂


I am very careful with my terminology; I am careful to say “nonprofit organization” or “501c3 tax exempt status” when I mean different concepts.


I think my Homeschool Co-ops book would be helpful at this point.

And perhaps my webpage of Articles and some podcast episodes.

Or my webinar on Create a Nonprofit for your Homeschool Community would be helpful at this stage as well.

If you still have questions (and you probably will!) I would be happy to arrange a phone consultation with you. Contact me.

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Homeschool group has victory with the IRS!

In a previous blog post I explained that the the IRS was going to deny 501c3 tax exempt status to a homeschool group, Sursum Corda in Southern California. The IRS employee claimed that this group of 35 families is only serving themselves and not serving a “public interest.”

I am happy to announce that after several weeks, the homeschool group received a letter stating that the IRS has determined they are tax exempt under 501c3 of the IRS Code! Yeah!

Victory for them and for all homeschool groups.

What helped convince the IRS that this homeschool group served a public interest?
In my 5 page fax to the IRS I outlined several key points:

  • Sursum Corda Community serves a public interest with activities that serve any and all homeschool families in three large counties, it primarily benefits children, a “charitable class,” and Sursum Corda serves the community at large in two ways: service projects and community-wide educational events (I think their service to the broader community was a very important factor with the IRS)
  • Sursum Corda is not exclusive; there is no significant private benefit; there is no inurement
  • Rev Ruling 69-175 is not applicable to Sursum Corda because they are not seeking 501(c)(3) status for parents’ personal expenses; Sursum Corda’s expenses are for the organization’s activities, not for the parents’ personal homeschool expenses.
  • Other cases of 501c3 status denied to charter schools is not applicable to Sursum Corda
  • Hundreds of homeschool organizations have 501c3 status

I concluded with this:

Sursum Corda Community, Inc. has an exempt purpose that serves a public interest, the education of children and parents and service to the larger community, and does not give significant private benefit to individuals. It is eligible for 501(c)(3) status and we look forward to the IRS determination letter.

Letter to IRS by Carol Topp, CPA

It’s hard to say what points changed the IRS’s mind, but I am grateful that HomeschoolCPA made a successful argument on behalf of Sursum Corda and all homeschool groups!

A special thanks to several nonprofit experts and several attorneys with Christian Home Educators Assoc of California (CHEA) and Home School Legal Defense Assoc (HSLDA) for their time in reviewing my response to the IRS. I greatly appreciate it!


HomeschoolCPA has two resources to help your homeschool organization apply for 501c3 tax exempt status
The IRS and Your Homeschool Organization book and the 501c3 Application webinar.


Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

IRS threatens to deny 501c3 status to homeschool group

UPDATE: The IRS sent the homeschool group their 501c3 tax determination latter on July 19, 2021! Victory! Read more to learn what HomeschoolCPA wrote to the IRS to change their mind.

It’s my worst nightmare: The IRS denying one of my homeschool clients 501c3 status.

As a CPA who has helped over 200 homeschool organizations apply for 501c3 tax exempt status over the past 20 years, I have never had a client be denied tax exempt status by the IRS. Until May 2021.

An IRS employee is considering denying 501c3 status to my client, a small homeschool co-op in California. She is claiming that this group of 35 families is only serving themselves and not serving a “public interest.”

This could set a very bad precedent if homeschool nonprofits are denied 501c3 tax exempt status.

While on a phone call with the IRS specialist, I explained that homeschool groups are a lot like private schools, offering classes, etc and that some private schools are smaller than 35 families.

She said,
“Yes, but you homeschoolers want a tax break.”

IRS Exempt Organization employee on phone call on May 17, 2021

Wait! What? Did I hear her correctly? I informed the IRS that there are no federal tax breaks for homeschool families.

She then went on to explain that I needed to read Rev Ruling 69-175 because that is her basis for denying 501c3 tax exempt status to a homeschool group.

I contacted HSLDA and CHEA of California for their assistance. Then I got to work researching, reading, studying and writing. I had four attorneys and three other experts in nonprofit tax exempt status read my document.

I faxed the IRS a 5-page document with facts and details how a homeschool co-op is broadly serving the community and not just private interests. I also explained why Rev Rul 69-175 does not apply to this client’s situation.

As of June 17, 2021 we have not received the IRS determination.

I’ll update this post when we hear back.


I’d like to ask for prayers for clarity of thinking for the IRS and a favorable reply for this homeschool co-op and all homeschool groups applying for 501c3 tax exempt status.

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

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