The IRS and Cooperative Fundraising

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Carol,

My homeschool group does several fund raisers where we divide the proceeds to each family to reduce the parents’ tuition. We have a shoppers reward program and I track how much of a tuition credit each parent earns by using their shoppers reward card.  We also let students or parents work off some tuition by volunteering to work a shift at our city’s major league baseball stadium concessions.  The team makes a donation to our homeschool group (a 501c3 organization).  I’m having a hard time finding information on the IRS website about these types of fund raisers.

Susan in Ohio (paraphrase from a spoken conversation)

Susan,

I’m sorry you found it so difficult to find information about fundraisers like your group is running. Sometimes you have to know the correct language to use in a search.

IRS Guidance on cooperative fundraising

The IRS does have a document titled Athletic Booster Clubs: Are They Exempt? written n 1993. I’ve read this document several times. It is a document that the IRS uses to train their employees. While it addresses athletic booster clubs, the principles apply to school booster clubs and homeschool groups that do fund raising.

Here is a white paper by Sandra Pfau Englund, an attorney with Renosi Law, P.A. www.nonprofitlaw.com where she explains the IRS’s 14 page document.

Her conclusion on what the IRS calls cooperative fundraising (fundraising activities in which individuals receive credit for funds raised) are pretty serious:

The following key conclusions are made based on a review of the federal law and the limited IRS writings regarding
cooperative fundraising and IFAs:
1. The IRS has found that engaging in cooperative fundraising activities using of individual fundraising accounts
(IFAs) may disqualify an organization for federal tax?exempt status under section 501(c)(3);
2. Cooperative fundraising activities are not strictly prohibited under federal law and IRS rules, and the IRS’
analysis and arguments are not convincing;. however,
3. If booster clubs engage in cooperative fundraising activities it is recommended that such activities make up only
an insubstantial amount of the booster clubs overall activities.

https://parentbooster.org/resources/documents/cooperative%20fundraising%20activities%20white%20paper.pdf

Ms Pfau Englund also founded an organization called ParentBoosterUSA. Her blog post on Athletic Booster Clubs Face Intense Scrutiny: 5 Tips to Keep Out of the Penalty Box is worth reading.

Your question about fund raising by working concessions at MLB games is also considered cooperative fundraising if you give credit to the participating families and therefore strongly discouraged by the IRS and most nonprofit experts.

Conclusion

I agree with ParentBoosterUSA, if you are using cooperative fundraising and giving credits or divide the proceeds among the participating families: STOP. Now. Use fundraisers to support the entire homeschool organization. Focus on paying for events or equipment that the entire group uses. Do not “credit” fundraiser proceeds to individuals or families based on the amount of funds raised or volunteer hours worked. 


Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Are fundraisers harming your chances for tax exempt status?

Many homeschool organizations depend on fund raisers to help run their homeschool co-ops and support groups. These fund raisers could actually harm a group’s chances of obtaining tax exempt status.

Fundraiser income was significant for this homeschool group

Julie is treasurer of a homeschool co-op in Oklahoma that desires to file for 501c3 tax exempt status with the IRS. I examined her financial statements and saw that the group depended heavily on profit from fund raisers including candy, food and flower sales. These fund raisers required Julie to collect over $12,000 a year in sales. The co-op made a profit of nearly $4,000 every year from their fund raisers.

“It’s a blessing to the co-op, because many of our families cannot afford even the small co-op fees we charge. And friends and neighbors beg us to keep selling our products, especially the locally made food.”

The profit from the fundraisers was actually more than the amount collected in co-op dues.

Unfortunately, with most of the co-op’s income coming from fundraisers and not membership fees or the group’s educational programs, the IRS may not grant Julie’s co-op 501c3 tax exempt status.

The IRS requires a significant portion of your income come from public support (i.e., the dues from your families or your programs) and not from an “unrelated businesses” (i.e. selling products in a fund raiser). The IRS defines “significant” in this situation as having more than 1/3 of your income come from public support.

IRS exceptions

Fortunately for Julie’s group, the IRS has several exceptions. One of them worked for Julie’s group. Her fundraising efforts were all done by volunteers and so the IRS considers that fundraiser as not being “unrelated business income” and that means they meet the 1/3 test mentioned above.

The IRS rules and exceptions for “unrelated business income” get a bit complicated and both the homeschool leader and I did our research. We were very careful and thorough when explaining the fund raising program to the IRS when Julie’s nonprofit filed for tax exempt status with the IRS.

More information about fundraisers

If your group has concerns about their fundraising practices, these related blog posts might help:

The IRS’s Word on Fundraising Do’s and Don’ts

The IRS and Fund Raising

What does the IRS mean by not allowing “private benefit” in a fund raiser?

…working to keep you on  the right side with the IRS!


My book Money Management in a Homeschool Organization has been helpful to hundreds of homeschool groups. It includes a chapter on “Easy Fundraisers” too!

_____________________________________

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Ideas of easy fundraisers for homeschool groups

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UPDATE: This podcast episode originally aired in 2014, but it is still very applicable in 2021, except that Box Tops has now gone digital! No more clipping coupons. 🙂



Your homeschool organization probably looks for extra ways to bring in money. Carol Topp, the Homeschool CPA, shares ideas for easy fundraising in this episode of the Dollars And Sense Show podcast.

Listen to the podcast here

Show Notes

Coupon and reward programs
Box Tops for Ed cation. Need 501c3 status
Shopping reward like Kroger Plus program
E Scrip

Food as a fundraiser
Pizza sales, bake sales to members
Candy, popcorn sales to public could impose a reporting to you state’s AG office
Restaurant (Chik-Fil-A) give a percent of proceeds from one night to your organization
Dinners as fundraisers

Donations
Via email, website, crowd funding, etc
Read-a-thon or walk-a-thon
Car washes and bake sales

Sell products
Ideas at TopSchoolFundraisers.com
Used curriculum sale. Charge an entrance fee, or a table fee to the sellers (or both!)

Reporting the Fundraiser income:
The IRS considers fundraisers to be unrelated to your nonprofit purpose and therefore, subject to taxation. Exceptions to the Unrelated Business Income tax:

  • Under $1,000 income from fundraisers in a year
  • All volunteer labor (no hired help to run the fundraiser)
  • Not regularly carried on
  • Selling donated items

State Charity Registration for fundraisers

Your state may require reporting to their Charitable oversight agency (usually the state Attorney General) if you sell to the public or solicit donations from the public. Some exceptions to registering with your state include: only making sales to your members, a dollar threshold ($25,000 is common), using all volunteer labor for your fundraisers. These exceptions vary by state.

Unsure about what reports your state requires or what exceptions you qualify for? HomeschoolCPA offers a service to research your states laws and required reports. IRS and State Filings Research

Here’s a helpful link to start researching what your state requires. Fundraising Compliance Guide

Warning: No Individual fundraising accounts!
See Scouts don’t allow individual fundraising account (and neither should you!)

More information

Money Management in a Homeschool Organization book

Blog posts on fundraising

Article “Easy Fundraisers for Homeschool Groups”

Unsure about what reports your state requires? HomeschoolCPA offers a service to research your states laws and required reports. IRS and State Filings Research

Money Mgmt HS OrgCover

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Homeschool theater program has income from advertising. Do they owe taxes?

Dear Mrs. Topp,

Our homeschool co-op has a yearly theater production that costs $35 per student to participate in the production. The theater teacher collects and uses all funds for the production. We now have local businesses that would like to advertise (by giving a donation) in the theater program. I understand that the business can use the donation as an advertisement write off, but what does the co-op or teacher do with the income, regarding the IRS?
Thank you for your time.

G.W.

Dear G.W.,

Good for your co-op for staging a theatrical production. I was in theater in high school and my daughter was in several homeschool theater productions too! It builds confidence!

The co-op teacher should turn over the funds to the co-op’s treasurer and he/she should deposit the money into a bank account that is established in the co-op’s name. A bank or credit union should open a nonprofit or a “club” account for the co-op.

They will want your EIN (Employer Identification Number) letter from the IRS. They may also want some official document like bylaws. My credit union wanted a letter signed by two officers stating that I, as the treasurer, had authorization to open an account for the nonprofit. Call your bank or credit union to see what they will require to open a nonprofit or club checking account.

You might find this podcast helpful: Tiny Homeschool Groups: Do We Need a Bank Account?

Income from advertising is NOT a donation from the donor. Do not give the donor a donation receipt. He received something or value (advertising) in exchange. He can deduct the cost of the ad in your theater program as advertising expense.

By the way, many nonprofits don’t accept ads, but rather “qualified sponsorships” and simply acknowledge their sponsors with a “thank you” in their programs. These are different from ads. Typically only the company name or logo is presented. No inducements to buy or product information is given in a sponsor thank you. Here’s a helpful explanation http://www.nonprofitlawblog.com/ubit-advertisements-vs-qualified-sponsorship-payments/

Advertising income is called unrelated business income for the nonprofit. Fundraisers and any income not related to your educational purpose is unrelated business income and and you must report it and pay tax on it.

Fortunately, the IRS has several ways to avoid paying the unrelated business income tax (UBIT):

  1.  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 volunteers (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 event or bake sale, 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.
  5. Qualified sponsorship payments are not unrelated business income.

Usually exception #1 or #2 will apply to small homeschool nonprofits, so your co-op should be able to receive 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.

I hope that helps.

Carol Topp, CPA
HomeschoolCPA.com
Helping homeschool leaders

Can my individual homeschool have a fund raiser?

Can we (an individual homeschool) be allowed to do fund raising similar to youth sports groups, scouts,etc?

What a good question. In general I say, Yes, you can participate in a fund raiser if the fund raising organization allows it. BUT, the profit you make is taxable income and you’ll need to report it on your tax return.

Another homeschooling mom e-mailed me with a similar question:

With 6 children needing school curriculum, we are coming up short in finances. We contacted a calendar company that said it would be permissible for us to sell calendars as a fund raiser for our homeschool. We accepted personal checks made out to our homeschool name (that we registered with the state school board, considered a non-profit private school). We do not have a checking account with our homeschool name on it. Therefore, we have no way to deposit them.

What is your advice to us? The checks amounted to $90. Is this method acceptable to continue as long as we pay taxes on it? Mrs. W.

By selling calendars Mrs W. was operating a small for-profit business. She is free to use the profit of the small business for anything she wishes, including homeschool books and supplies. Since Mrs W. didn’t mention what state she was in, I cannot determine if her state requires business registration. Many states do not require any type of registration for a sole proprietorship using your own name. You may have to file a name registration with your Secretary of State to establish a business name.

To deposit these checks Mrs W. needs to open a checking account in the homeschool’s name. You’ll have to get an EIN number from the IRS at www.irs.gov. You can then spend the money in the checking account on homeschool supplies and close it or keep a small amount in it until next year.

Mrs W. should report the $90 as income on her tax return as either Other Income on line 21 of the 1040 or on Schedule C Business Income if she had expenses from the sale of the calendars (postage, mileage, etc…)

Quite a lot of work for a $90 fund raiser, huh?

Before you try a fund raiser for you individual family homeschool make sure its worth the effort of getting a business name, EIN, and checking account.

Is it worth the time and effort for the money you will raise?
Maybe try having a garage sale or sell something to bring in income instead!

My book Money Management in a Homeschool Organization covers fundraising and offers some ideas for easy fundraisers.

 

Carol Topp, CPA
HomeschoolCPA.com

Homeschool groups and fundraisers. Do you know what your state requires?

Michelle asked a question about fund raisers in a homeschool group:

Hi Carol,
We have had fund raisers in the past (Butterbraids, a frozen pastry) and have made approx. $1,500 doing that fund raiser. We had a cooking class that prepared hot lunches and the co-op made money on those. We will have less than $100 left in the check book. We have a Fed ID #. What do we do? What about next year? Is fund raising not a good idea for us as you say in your website? We thought about charging more for membership (we charge $35/ yr now) and if people wanted to do individual fund raisers that would be up to each family. What do you think? Thank you so much for your help to the homeschool community and for whatever answers you can give us.
Sincerely,
Michelle P

Dear Michelle,

Did I say fund raising is not a good idea? I didn’t mean to. Hopefully, I just warned groups that fund raising can be a lot of work.

Charitable Solicitation filings 
If you hold fundraisers by selling products to the public (outside your own membership) you may need to report your “solicitation” to your state, typically the Attorney General’s office.

In my home state of Ohio, nonprofits have to file a Charity Registration form if they do fund raising to the public. One year my homeschool co-op sold candles door to door and had to file a seven-page financial report with Ohio’s Attorney General Office. That report was such a nuisance (and the fund raiser was so much work) that the co-op no longer does sales to the public.

Investigate what your state requires from groups doing fund raisers. These websites have information on nonprofit reporting requirements by state:

https://www.hurwitasociates.com/

https://www.harborcompliance.com/fundraising-registration

In general I encourage groups to get most of their income from membership fees and not depend too much on fund raising. Fund raising can be very successful or turn out very poorly. It is also a lot of work with sometimes only a few people doing all the work.

Individual fundraisers

I’m not sure what you mean by “individual fund raisers.” I do know that it is not proper to “award” a family for raising more money than another family, nor is it proper to set up individual accounts. It’s not right because it is not in keeping with the nonprofit motive or with the idea of a group benefit. In short, individuals are not supposed to benefit; the group is supposed to benefit.

 

My book Money Management in a Homeschool Organization covers fundraising and offers some ideas for easy fundraisers.

 

Are you up to date on your state filing requirements for your homeschool nonprofit organization? Do you even know that your state may require annual reports?

Most states require some reporting from nonprofit organizations on an annual basis. My webinar on IRS and State Filings for Homeschool Nonprofits will explain the state reports and help you research your state’s requirements.

 

 

Carol Topp, CPA

HomeschoolCPA.com

Holding a fundraiser to pay for homeschool curriculum

Photo credit TheMagicOnions.com

 

I homeschool my 3 children and 3 children of another family. As a project, we learned how to create a school website and as a idea to raise money for curriculum, supplies and hopefully a field trip or two. We’re in NC and also considered a private school.

We thought of an idea to sell Fairy Gardens that we personally make and accept donations on our website. Am I breaking any laws by not being registered as a business or non profit? 100% of profits will be spent on the school, but it goes to my own PayPal account and I state on the website that receipts for the donation being spent on the school and states that the donations are not tax deductible.

It dawned on me that it might not be allowed to do this without some kind of permit. I’m not sure though because I would be allowed to make fairy gardens and sell at a yard sale, so is it different if I sold them online?

Also, can I be a non-profit since I homeschool the children of two families and not just my own? I would greatly appreciate your feedback on this and thank you so much for all of the knowledgeable information you’ve shared on your site!

Best wishes,

April in North Carolina

 

 

April,
You and the other family are not a nonprofit organization, even if North Carolina classifies your homeschool as a private school. Private school  only means you are not funded with public (i.e. government) funds. It does not make you or your business a nonprofit organization. (BTW, some private schools are for-profit businesses.)

In order to be a tax exempt nonprofit, the IRS says you must be operated and organized as a nonprofit.

A tax exempt nonprofit organization “must not be organized or operated for the benefit of private interests” (Source: https://www.irs.gov/charities-non-profits/charitable-organizations/exemption-requirements-section-501c3-organizations).

So benefiting only you and the other family is “private interests” and not serving a public good, therefore you cannot be a nonprofit organization with only two families getting all the benefits.

Your fairy garden business is NOT a nonprofit. It is a business, probably a micro business. Stop calling your sales “donations.” They are simply sales of products (fairy gardens in your case) by a business.

You probably need to register in North Carolina as a business and probably get a vendors license to collect and pay sales tax.
Better start googling “Start a small business in North Carolina.”

 

My books Micro Business for Teens could help your children start this as their business (not yours) and learn a lot too!

 

 

 

 

 

 

Additionally, your comment about selling your products at a yard sale is not quite correct. You can sell fairy gardens at a yard sale, but then you’re running a business and the profit is taxable. In yard sales, you are generally selling household items you bought over many years and used personally and selling them for less than you paid for them. But that’s not true for your fairy gardens. You did not use them personally and you are selling them at a profit, so it’s a business and you should register it and apply for a vendor’s license.

 

Carol Topp, CPA

What is Unrelated Business Income or UBIT?

 

A nonprofit group may raise a lot of money from fund raising. These fundraisers could be so successful the leaders may wonder if the homeschool group owes anything to the government in taxes. For the most part, fund raising is not considered part of your nonprofit 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 a homeschool group or any nonprofit raises from a fundraiser “Unrelated Business Income,” meaning it is money collected in a trade or business that is not related to your primary mission (or what the IRS calls your “exempt purpose”).

In this short podcast episode (13 minutes)  Carol Topp, the HomeschoolCPA, will explain the 4 exceptions to UBIT:

 

Do you have more questions about conducting fundraisers? My book Money Management in a Homeschool Organization can help.

  • Does your homeschool group manage their money well?
  • Do you have a budget and know where the money is spent?
  • Do you know how to prevent fraud?

This 115 page book will help you to open a checking account, establish a budget, prevent mistakes and fraud, use software to keep the books, prepare a financial statement, and hire workers. Sample forms and examples of financial statements in clear English are provided.

Money Management in a Homeschool Organization

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Summer reading for homeschool leaders: Homeschool Co-ops

 

This summer, I’ll be featuring one of my books for homeschool leaders every few weeks.

This week it’s my first book for homeschool leaders,

 

I published this book in 2008 with a different cover. In 2013 I updated it and chose a new cover.

 

HomeschoolCo-opsCover

Original cover

HS Co-ops Cover_400

Updated cover

This book will help homeschool leaders start and run a homeschool co-op.

It has chapters on:

Part One: Starting a Homeschool Co-op
Chapter One: Benefits of Co-ops
Chapter Two: Disadvantages of Co-ops
Chapter Three: Different Types of Co-ops
Chapter Four: Your First Planning Meeting
Chapter Five: What’s in a Name? Names, Missions

Part Two: Running a Homeschool Co-op
Chapter Six: Leadership
Chapter Seven: Co-op Offerings
Chapter Eight: Money Management
Chapter Nine: Managing Volunteers and Conflict
Chapter Ten: Ready for the Next Step? 501c3 Tax Exempt Status

Part Three: Not Burning Out
Chapter Eleven: Avoiding Burn out

Read a sample chapter

Read more about Homeschool Co-ops the book

 

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Homeschool leaders summer reading: Money Management in a Homeschool Organization

 
This summer I’m encouraging homeschool leaders to take time to become a better leader by reading through my books. This week I’m featuring my book,

 

When I originally published this book in 2008, it was a short 40 page ebook and had a horrible cover.  I was still learning and self-publishing was brand new!
MoneyMgmtCover
An update was badly needed and I tackled that project in 2014. The book ballooned to 131 pages and I subtitled it “A Guide for Treasurers.” I feel like I poured my CPA brain into this book.

 

Cover Money Mgmt HS Org
 Topics covered in this book include:
Chapter 1: Your Treasurer is a Gem!
Chapter 2: Checking Accounts Done Right
Chapter 3: Super Simple Bookkeeping Basics
Chapter 4: Show Us Your Books! Regular Reporting on Financial Status
Chapter 5: Establish a Budget: You’ll Thank Me Later
Chapter 6: Get What’s Coming to You: Collecting Fees
Chapter 7: Do I Have to Report This? Reimbursement Policies and Avoiding Taxes
Chapter 8: Using Software to Stay Sane
Chapter 9: Fraud: It Couldn’t Happen to Us
Chapter 10: Need More Money? Easy Fundraisers for Homeschool Organizations
Chapter 11: Risky Business: Insurance for Homeschool Groups
Chapter 12: Paying Workers: Hiring Employees and Independent Contractors
Chapter 13: Homeschool For Profit: Running a Homeschool Group as a Business

 

 

 

Carol Topp, CPA

 

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