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

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