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

Are my homeschool co-op fees tax deductible?

I’m a homeschool parent and member of a homeschool co-operative that weeks weekly. I have to pay tuition to this group for the classes my children take there. Can my children’s tuition for the co-op be a tax deduction?

 

I assume you mean deductible as a charitable donation.

Co-op fees are not a tax deductible charitable donation because services (co-op classes for your children) were received in return for the tuition payments. Tuition payments are not a tax deductible donations.They are personal expenses and are not tax deductible.

But if a parent makes a charitable gift to the homeschool group (assuming it has 501c3 tax exempt status from the IRS) above and beyond the tuition and fee payments, then this amount would be a tax deductible donation.

Some homeschool parents ask if co-op fees can be deducted as childcare expenses. My reply is “usually not” and here are the details: Are homeschool co-op fees child care tax deductions?

 


Did you get paid for teaching at a homeschool program? You may have questions about your taxes? I offer webinar to help you understand the tax implications of being a paid homeschool co-op teacher or tutor:

I recorded a webinar on Tax Preparation for Homeschool Business Owners. It should be a lot of help to tutors, non-employee co-op teachers and other homeschool business owners! You can watch the recording at HomeschoolCPA.com/HSBIZTAXES for a small fee of $10.

Carol, thank you again for the webinar. It was one of the BEST webinars I’ve EVER attended. If you do hold another one, I would pay for it hands down. Totally worth the $10! -Denise, webinar attendee

“I actually don’t care for webinars at all – it is not my learning style at all and I struggle to focus, but this one was extremely value and had my attention”. -Mary, webinar attendee


I hope that helps!

Carol Topp, CPA

HomeschoolCPA.com

Helping homeschool leaders

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

Who’s Afraid of the IRS? (podcast)

IRS and homeschool


UPDATE: This podcast episode originally aired in 2015. I am amazed at how accurate it still is 6 years later!


Are you afraid of the IRS? Should you be?

How does the IRS see homeschool organizations?

In this episode of the Dollars and Sense podcast, host Carol Topp, CPA discusses how the IRS sees homeschool organizations. Carol discusses homeschool support groups as IRS 501(c)(7) Social Clubs and homeschool co-ops as 501(c)(3) educational organizations.

Listen to the podcast here

Get a copy of the handout Who’s Afraid of the IRS Handout

More information

The second part of this podcast presentation, “How the IRS sees homeschool groups”

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.

The IRS and Your Homeschool Organization

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

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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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

What does it cost to get tax exempt status?

How much does it cost to be a 501c3? My homeschool group is new and we don’t have a lot of money.
-Homeschool leader

 

Dear homeschool leader,

It’s not as expensive to apply for 501c3 tax exempt status as it used to be, especially if 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 of the cost to get 501c3 status 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. The cost of the webinar is $25.

 

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

 

Carol Topp, CPA

HomeschoolCPA.com

Change your homeschool group’s name on your EIN

Carol,

Our homeschool group formed a nonprofit corporation in our state with the name Grace Home School Organization. We just discovered that our EIN with the IRS has Grace Homeschool Organization with  “Homeschool” as one word, not two words. What do we do?

Dave

 

Dave,

The name on your incorporation paperwork takes legal precedent over the name on the EIN, so you need to notify the IRS that there is an error in the EIN’s name. Here is what I found on how to change your name on your EIN.

https://www.irs.gov/charities-non-profits/charitable-organizations/change-of-name-exempt-organizations

Write a letter to  IRS Exempt Organization (P.O. Box 2508  Cincinnati, OH 45201) or Fax: (855) 204-6184. Include a copy of the amendment to the Articles of Association, Constitution, or other organizing document (i.e., original Articles of Incorporation) , showing the effective date of the change of name and signed by at least two officers, trustees or members.

The letter or fax reporting the change of name must include your organization’s 

  • full name (both the prior name and the new name) 
  • Employer Identification Number and 
  • authorized signature (an officer or trustee) 

The individual signing the letter must state the capacity in which he or she is signing (for example, “John Smith, President”).

 

Include a copy of your original incorporation paperwork (Articles of Incorporation) from your state proving your legal name is Grace Home School Organization. The IRS should simply correct the incorrect spelling of “Home School” on the EIN.


Have you set up your homeschool group as a nonprofit corporation? Do you know the benefits and the process?

Carol Topp’s webinar Create a Nonprofit for Your Homeschool Community walks you through the steps of forming a nonprofit and getting incorporated in your state.


 

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders