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.
by Christy Forhan

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).

Get More Parents Involved - Host a School Family Night and encourage more families to connect to your school by inviting them in for a memorable night of family fun. Our FREE SFN planning kits make planning and organizing your event a breeze. Order yours now.

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.


Fortunately, our members voted unanimously to allocate the $500 for the application fee and we moved forward. (The fees have gone up since then—$850 for groups with annual gross receipts of $10,000 or more, and $450 for groups with revenue of less than $10,000.)

Luckily, I had several months between my aha moment and our auction. Good thing, because it took me nearly that long to get the application together. Do not despair if you are just starting the process; it probably will not take you as long as it did me. Today, there are great resources available to help you through the application—specifically the PTO Startup Toolkit and the wonderful knowledge pool on the ptotoday.com message boards.

The effort and time it takes for you to complete the application is also influenced by other issues. Good record-keeping, help from fellow officers, and how long it takes to finalize key decisions will affect your timeline. Though the process should not become your full-time job, it could, realistically, spread over several weeks or even months.

Based on the amount of financial information required in the application, the treasurer is the logical person to complete it. However, if your PTO has another volunteer who is willing to take on an important and complex task, someone who will not give up until the job is done and is not afraid of numbers, writing, or the IRS, then you might choose to delegate the application process.

Incorporation—Yes or No?

Our PTO actually had two decisions to make. In addition to deciding to apply for federal nonprofit status, we also had to decide whether we wanted to incorporate in our state. I learned that if a PTO incorporates, a primary benefit is a form of protection for the officers, although the rules vary from state to state. In our state, when a corporation is sued, only the assets of the corporation are at risk; the assets of the officers are protected in most cases. That grabbed my attention when I realized the “assets of the officers” could be my house, my car, my savings.

Very quickly incorporation sounded like a great idea. For a fee of $20, the PTO was incorporated by fax in less than 24 hours. Not a big deal. Check with your state’s department of commerce or secretary of state’s office for information about incorporating.

But wait! If your PTO is considering incorporating, do this before you complete Form 1023 for the feds. As far as the IRS is concerned, a newly incorporated organization is a brand new organization, even if nothing else has changed. That means the new corporation would need to reapply for 501(c)(3) designation—another Form 1023 and another application fee. If your unincorporated PTO already has its 501(c)(3)status, you could go ahead and reapply with the IRS after you incorporate.

Advice From the Trenches

I have had the pleasure of completing Form 1023 for two different PTOs. In the process, I bumped into a few obstacles that slowed things down. Here is some advice that may help you avoid some of those same pitfalls.

Ask for help from fellow officers. There are several questions on the application about your PTO’s mission, purpose, structure, and activities. Try to delegate the writing of these answers to other officers so you can focus on the financial data required.

Read the instructions carefully. Spend some time poring over the instructions for Form 1023 with a highlighter and a clear head. You should also read IRS Publication 557, titled "Tax-Exempt Status for Your Organization." It talks about the rules and responsibilities of a nonprofit, plus it explains key terms. You can order the materials from website www.irs.gov at no cost.

Contact the IRS for help. There will most definitely be questions in the application that do not make sense. Before giving up or guessing, call the IRS at 877-829-5500. Also, www.irs.gov is jammed full of information and is easy to navigate. Look for buttons to direct you to “charities and nonprofits.”

Be sure your articles of incorporation or constitution has all the required language. The IRS requires specific language in your organizing document. (This is separate from your bylaws). See the PTO Today Startup Toolkit for lots more information on filling out the form.

Make copies of everything. Keep a complete copy of the application with all attachments for the PTO’s files. There is a lot of financial information required, so also keep a copy of the reports you used to substantiate the details in case you ever need to explain your answers.

Approved!

When you get a Determination Letter from the IRS that says your application has been approved, it is a cause to celebrate. But that’s not the end of your responsibility. Each year, 501(c)(3) organizations are required to file Form 990, Form 990-EZ, or Form 990-N (depending on the amount of gross receipts collected) with the IRS. This form is essentially a tax information return, without any taxes owed.

Although the form is not due to the IRS until several months after the end of your fiscal year, it is a good idea to download the form and instructions as soon as possible. As you familiarize yourself with the form’s requirements, you might decide to restructure some of your financial data to make it easier to complete the form for you and future treasurers.

If your PTO is incorporated, you may also be required to complete an annual renewal form. Check with your state on its specific filing requirements and any fees that might be necessary.

 

Comments   

#71 Ted 2013-11-22 18:18
A long time ago, our pto/pta was part of the school and even included in their budget. Over the years, it broke out and incorporated and received 501(c)(3) status.

Does anyone know if legally, the school district can state that the PTO, independent/non profit charity, must seek approval from the school committee for fundraisers and events? Seems to me that the school committee and the schools would not want to be seen as 'operators' of a non-profit.

Certainly the PTO should work with the school and school committee but people are a little hung up on 'asking permission'--se ems to unnecessarily complicate the PTO's efforts.

Thoughts?
#70 Craig Bystrynski 2013-10-21 13:53
Hi Margaret -- Selling gym uniforms as a fundraiser won't jeopardize your 501c3 status. It's a fairly common practice and well within IRS rules. -- Craig
#69 Margaret in IL 2013-10-19 16:33
Does anyone know if it is in violation of the 501c3 status if a PTO "sells" required gym uniforms and makes a profit? Assume it is not stated on the gym uniform purchase form that "such and such" dollar amount of the cost of the uniform will go to the PTO.
#68 Craig Bystrynski 2013-08-16 13:56
Anon -- Although they seem like the same thing, there's a distinction between being nonprofit and being tax-exempt. If you operate like a nonprofit, you can be considered a nonprofit. But to be officially tax-exempt, you must file form 1023 with the IRS.

Lots of PTOs operate as nonprofits but don't officially have tax-exempt status. However, the IRS is increasingly cracking down on that. They want all small nonprofits to register.

I would think you could sell that message to your PTO without being the bad guy: We've operated this way for a long time, but now the IRS is making all nonprofits apply for tax-exempt status. So we need to start the process.
#67 Anon 2013-08-16 00:04
I have a dilemma. I recently was given a PTO with NO paperwork other than bank statements. The legal details are sketchy. The last PTO president isn't forthcoming.

The bank account claims to be non-profit but the IRS has no record of it. The EIN is not that of the school, I don't know where it is from - no paperwork. The PTO isn't registered with the state as a corporation or a non-profit. I have no records of any tax filings.

I have inquired with the IRS about the EIN, but time is short and I need to get this year going. To start anew would relieve me of responsibility for the last sloppy PTO president's sins but it would also plaster my name all over the PTO - something I want to avoid because I want someone else to take over after my term. And it would cost almost a thousand dollars.

Thoughts?
#66 Larry Beyer 2013-08-15 17:04
Christy:

Great article; very helpful Like you I am in Michigan. One of the steps I've been told we need to do in setting up our PTO is to register with the Attorney General's office as a Charitable Trust. This is after we have submitted Articles of Incorporation on Form CD 502 and simultaneously as we are requesting a determination from the IRS. When I spoke to the AG's office, it seemed that they may have periodic filing requirements if our PTO meets certain criteria. This is independent of the IRS, the State Dept. of Licensing and the State Dept. of Treasury. Did you run into the same thing? Is this an easy process? What are the ongoing obligations?

Thanks,

Larry
#65 Stacy 2012-09-05 22:55
What are the restrictions of 501c3
If we are selling entertainment books are we allowed to give out cash prizes? Prizes at all?
#64 Jessica 2012-02-28 00:48
Thank you for the quick response. Would we also want to put the amount in the expense area (possibly line 23) if we received the products from the LFE program, however, gave them to the school to use?

Thanks again
#63 Rose C. 2012-02-27 21:51
Hi Jessica,

Regarding your question on Form 1023 and Labels for Educaiton, here's what we have learned from our call to the IRS: Put the estimated value of the items you got from LFE on Line 7, Part IX, and explain what it is on the attached itemized list as requested. Unless the PTO has an incredibly loyal and robust LFE program, the value is probably a very small part of their overall revenue. Please stay in touch if you need more information and I hope that helps, Rose C.
#62 Jessica 2012-02-23 00:09
When completing Form 1023 (line 1), would our PTO have to include revenue from Labels for Education? If so, how do you place a value on this?

Add comment

Security code
Refresh