501(c)(3) for Parent Groups. The Basics

Transcription

1 501(c)(3) for Parent Groups The Basics

2 Do 501(c)(3), tax exemption, and nonprofit all mean the same thing? People tend to use these terms interchangeably, but they have distinct definitions. 501(c)(3) refers to federal tax exemption under the IRS tax code. The IRS often refers to these groups as exempt organizations. Groups can also have state tax exemption. In some states, you can become tax-exempt at the state level just by incorporating. Nonprofit refers to incorporation status at the state level.

3 Does my group have to be incorporated and tax-exempt? Nope! You can be incorporated in your state and not be a federally recognized tax-exempt organization. You can be recognized as a 501(c)(3) organization and not be incorporated. Incorporating as a nonprofit is generally pretty inexpensive and simple to do plus it s complicated (and expensive!) to do it later if you change your mind. Because of that, we recommend that groups incorporate first, then file for federal tax-exempt status.

4 Recommended steps for becoming a 501(c)(3) 1. Apply for an EIN An employer identification number is assigned by the IRS to identify your group as a legal business entity. You need this number: to open a bank account to apply for federal tax-exempt status Having an EIN does not automatically make you tax-exempt OR nonprofit.

5 Recommended steps for becoming a 501(c)(3) 1. Apply for an EIN Many states require an organizational bank account for incorporation, so you ll need the EIN first to set up this bank account. To check whether your PTO has its own EIN, ask the school for its EIN. Then see if it matches the EIN being used for your bank account. Applying for an EIN is easy and free don t use a feebased service! If you apply for an EIN online, you ll receive your number immediately.

6 Recommended steps for becoming a 501(c)(3) 2. Incorporate The nonprofit designation doesn t mean your group can t make a profit (i.e., have more income than expenses): It means you don t have shareholders or pay dividends. The money your group makes goes back into your organization to further its nonprofit mission. Go to the corporations website within your state for information on how to apply. (Search your state name and incorporation to find the office that handles it.)

7 Recommended steps for becoming a 501(c)(3) 2. Incorporate Benefits of incorporating: It protects officers personal assets. If someone sues your officers for decisions they made as parent group leaders, the corporate shield will protect them. It creates a clean slate for your group; when you incorporate, you become a new organization with no history in the eyes of the IRS. If you incorporate as a nonprofit in your state and then become tax-exempt at the federal level, you can follow up and become exempt from paying state-level income and sales taxes.

8 Recommended steps for becoming a 501(c)(3) 2. Incorporate Articles of Incorporation best practices If you want to apply for 501(c)(3) tax-exempt status from the IRS, your articles of incorporation (aka organizing document ) must include a description of your exempt purpose as well as steps that will be taken to dissolve the organization. The exempt purpose is something like this: The corporation is organized and will be operated exclusively for charitable and educational purposes with the meaning of section 501(c)(3) of the Internal Revenue Code. Specifically, the corporation is organized to support the education of children at ABC Elementary by fostering relationships between the school, parents, and teachers. The dissolution clause says that if your organization ceases operation, its assets will be given to another charitable group or to a government entity (not to a for-profit company or any individuals).

9 Recommended steps for becoming a 501(c)(3) 3. Apply for 501(c)(3) Tax-Exempt Status Federal tax exemption means your group will not need to pay federal income tax on net income from activities related to its mission. It s not as easy as filing for state incorporation, but it s a worthwhile investment in your group. To become a federally recognized tax-exempt organization, most groups will file the simpler Form 1023-EZ and pay a $275 fee (anticipated gross receipts of less than $50,000).

10 Recommended steps for becoming a 501(c)(3) 3. Apply for 501(c)(3) Tax-Exempt Status Benefits of becoming tax-exempt: It shows your community that your group takes itself and its mission seriously. Donations to your group are tax-deductible for the donors. Many grants are open only to 501(c)(3) groups.

11 Recommended steps for becoming a 501(c)(3) 501(c)(3) Application Tips You should have bylaws in place before applying for federal income tax exemption. The IRS requires that bylaws include a conflict of interest policy. We recommend that groups use the suggested wording from the IRS, even though it s long and more detailed than needed for PTO business, because that guarantees it will be accepted by the IRS reviewer. If you ve been grossing more than $5,000 a year for several years, apply for retroactive status. The IRS will want to know why you didn t apply for tax-exempt status sooner and will want to know why it should grant you retroactive status. Acceptable answers include because we applied for 501(c)(3) status before the IRS discovered that we didn t.

12 Recommended steps for becoming a 501(c)(3) 4. Keep Your Determination Letter Safe! This letter is the proof that your PTO is a federally recognized tax-exempt charity under section 501(c)(3) of the federal tax code. Don t lose it! Make copies for the principal and the parent group president. Keep the original with the parent group treasurer s permanent files.

13 Recommended steps for becoming a 501(c)(3) 5. Apply for State Tax Exemption The rules vary from state to state. Most require a separate (usually brief) application process for state-level exemption from income, sales, and use taxes. Search your state name and sales tax exemption to find out what you need to do.

14 Filing the annual IRS information return If your group grosses $50,000 or less in a given year, you electronically file the very short, very quick Form 990-N. If your group grosses more than $50,000 in a given year, you can file Form 990-EZ. The typical PTO will include three schedules (additional forms) with Form 990-EZ: Schedule A, Schedule G, and Schedule O. The PTO Treasurer s Toolkit includes detailed, line-by-line instructions for Form 990-EZ and these schedules.

15 Filing the annual IRS information return Most groups run on a fiscal year corresponding to the school year. Form 990-EZ returns get filed for the tax year that begins the fiscal year. Another way to think about it is to use the year that matches up with December in your fiscal year. For the school year, you d file the 2017 Form 990-EZ. Returns are due on the 15th day of the 5th month after the end of your fiscal year. For example, for a fiscal year ending June 30, returns are due Nov. 15.

16 What happens if we re late filing our information returns? If you ve missed 1 or 2 years: If you gross less than $50,000 and are filing Form 990-N, don t worry get this year s information filed on time and make sure not to miss any future ones. If you gross more than $50,000 and are filing Form 990-EZ, you ll need to complete the forms for the missing years. You also might have to pay some late filing fines, but call and talk to the IRS the fines may be waived.

17 What happens if we re late filing our information returns? If you ve missed 3 years or more: Unfortunately, your tax-exempt status has probably been revoked. You can get it reinstated with another filing fee and by completing Form 990-EZ for the missing years. Learn more about automatic revocation on the IRS website.

18 Other annual tasks Requirements vary widely by state, but here are some common tasks. The IRS doesn t require charitable organizations to do a yearly financial review (aka independent audit), but some states do. It s a good practice for every parent group to follow, no matter how small. It can be done by parent volunteers; you don t need a professional. Some states require Form 990-EZ to be filed with a state office as well as with the IRS. (For example, in Massachusetts, public charities must fill out an additional form, provide copies of the federal 990-EZ, and pay a small fee.) Incorporation status often has to be renewed with a form and fee.

19 How long to keep paperwork Permanently incorporation paperwork IRS Form 1023 and documentation IRS determination letter meeting agendas and minutes year-end treasurer reports annual financial review reports 7 years bank statements canceled checks check registers IRS Form 990-series 3 years monthly treasurer reports

20 Are we allowed to? If you have a question about what is and isn t allowed in your group: Check your bylaws. If your bylaws or standing rules don t specify, then Robert s Rules of Order is the most likely next reference. If your question isn t addressed in your own documents or in Robert s Rules, then you don t have any reason to exclude the behavior you re questioning.

21 Are we allowed to? FAQ: Can one officer hold two positions? If your bylaws don t explicitly exclude it, then it s fine for one person to hold more than one office (and, in fact, this is pretty common in a small organization like a school parent group). FAQ: Can a teacher/someone without children at the school run for a board position? Check the bylaws for who is eligible to run for office (usually a member in good standing ) and then for how a member in good standing is defined. If teachers or non-parents aren t explicitly called out as ineligible for office or for membership, they they can run for a board position.

22 PTO Today Resources PTO Today Startup Toolkit sample articles of incorporation sample bylaws line-by-line instructions for Form 1023-EZ PTO Today Treasurer s Toolkit annual financial review guidelines line-by-line instructions for Form 990-N, Form 990-EZ, and Schedules A, G, O Tax Exemption and Nonprofit Status: What PTOs Should Know PTO Record-Retention Rules 501(c)(3) FAQs for Parent Groups PTO Bylaws FAQs Switching From PTA to PTO Parent group insurance, including Directors & Officers (D&O)

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