How to make your PTO tax-exempt. We sort through the mumbo jumbo and tell you what to expect—from the process and the IRS.
Let’s start with a test. Question number one: When I see the label “501(c)(3),” I...
a. Feel confident
b. Start to sweat
c. Wonder what that means
If you answered A, your PTO probably has already completed the process to be recognized by the Internal Revenue Service as a nonprofit charity. Good job. If you answered B, you probably know enough about becoming a nonprofit to know it’s a good idea, but you may feel overwhelmed or nervous. And if you answered C, you live in blissful ignorance.
I lived in blissful ignorance for several years as a PTO member and officer. Back when I thought of our PTO as just a little group of active parents, it was easy to ignore any hint that we needed to be responsible to an outside authority. At that time, I was treasurer and our PTO was planning a major fundraising auction for the next fall.
I had started to see items about nonprofit status, the IRS, and 501(c)(3) in PTO Today and its online discussion forum. Somewhere along the way, I made the connection that if we wanted to solicit donations, we should be a “real” nonprofit organization. Aha! But just how do you do that? Interacting with the IRS was frightening. The whole process seemed too complex for our little organization. Why would a PTO need to be that official? Where on earth would I begin? I moved from blissful ignorance to controlled panic.
Like many other PTOers, I was under the mistaken impression that if we had our own tax ID number, then we were obviously tax-exempt. And if we were tax-exempt, then our donors could deduct their donations on their federal tax returns, right? After all, we had done an auction before, and nobody worried about 501(c)(3).
I bet you can find a member who will insist that if the PTO has a tax ID number, then it is automatically exempt. Heck, some people even call it a tax “exempt” number. Well, it’s not quite that simple. Soon I learned the tax ID number is just the first step to completing the application for nonprofit status. Clearly, I had some research to do, and then I had to sell the whole idea to our members. It was going to cost us several hundred dollars to apply for 501(c)(3) status, and I knew I had to have my facts straight and my justifications in line before our members would vote to spend that kind of money on something so intangible.
Getting Them On Board
Selling the idea of 501(c)(3) to a room full of PTO members is really an exercise in education. I wanted to help our members understand the benefits of nonprofit status without dragging them through the details of the application, called Form 1023. After I felt I had a good idea of why we should apply, I put together a short presentation for one of our monthly meetings. There were several key justifications.
Donations to the PTO are tax-deductible. This was our primary motivation to apply for 501(c)(3) status. We wanted the assurance that our auction donors could confidently deduct their donations on their federal income tax forms. We did not try to give tax advice, but we knew that having our 501(c)(3) was a good thing for our donors.
PTO purchases are exempt from state sales tax. In our state, Michigan, when a PTO earns its 501(c)(3) status, it automatically becomes exempt from paying state sales tax on purchases made by the PTO. Rules vary from state to state, but it is likely that your PTO could also enjoy this benefit.
501(c)(3) status makes our PTO more credible and reinforces our independence. As our own official nonprofit organization, we are responsible only to our members. Though we have never had an adversarial relationship with the school or district, our 501(c)(3) communicates that the PTO is a legitimate, serious organization that is in this for the long haul. Oh, and you should know that even though the term is “nonprofit,” we are allowed to make a profit on our activities, keep savings in the bank year to year, and earn interest on our money.
Some grants and special postal rates are available only to 501(c)(3) organizations. Our PTO has not taken advantage of these privileges, but it is nice to know we could.
Otherwise, it’s possible we should be paying corporate income taxes. Personally, I do not know of an unregistered PTO being audited by the IRS, but it could happen. Maybe the IRS would be lenient and allow the organization to apply without penalty, but that’s not a risk I thought our PTO should take.
It’s the right thing to do. Once we learned about 501(c)(3) status for PTOs, it seemed we almost had a moral obligation to follow through.
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