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This article is part of the following categories:
Bylaws/Nonprofit President PTO vs. PTA


501(c)(3) for PTOs

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).

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 $500 to apply for 501(c)(3) status ($150 for groups with lower yearly revenue), 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.

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 Start-Up Guide 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 $150 or $500 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 Start-Up Guide 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, most 501(c)(3) organizations are required to file Form 990 with the IRS. This form is essentially a tax return, without any tax 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.

Christy Forhan is an experienced PTO treasurer who has filled that role for two parent groups serving West Bloomfield, Mich., schools.



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Comments

  1. avatar

    Posted by Chaundra Haynes on Nov. 17, 2009

    Can a private (for profit) school have a non-profit PTO? I thought I read somewhere that it's possible, but I want to double check.
    Thanks
    Chaundra

  2. Posted by - Craig Bystrynski from PTO Today on Sep. 09, 2009

    Hi Jaymie,

    You can definitely do this. I believe the way it typically works is you form an umbrella organization (a countywide or regional PTO) and the school PTOs become sub-groups of that organization. It's more complicated than setting up a single school PTO as a 501c3, but it can save a lot of money in application fees. The IRS can give you more information (use the nonprofit helpline: 1-877-829-5500), and you might want to chat with an attorney who has experience with nonprofits.

    Craig

  3. Posted by - Jaymie on Sep. 09, 2009

    Our children change schools every 2 years. Would like to pursue the 501C3 for all schools together in our county. Is this possible? Wish to get us all on board together and then if parents can and wish to volunteer, they will be ready to go. Can you have several schools on one 501C3? Can each school then have a separate financial account? Thanks!

  4. Posted by - Craig Bystrynski from PTO Today on Aug. 18, 2009

    The IRS has a pretty good publication about the requirements for 501c3 charities -- and it's just a few short pages: http://www.irs.gov/pub/irs-pdf/p4221pc.pdf

    In brief, if you spend your money in ways that match your mission (helping the school), file an annual tax information return, and avoid endorsing political candidates, you're in good shape. The chief concern for most groups is keeping good financial records, which are necessary for the tax information return.

    Craig

  5. Posted by - R.C. on Aug. 17, 2009

    We have all new officers in our PTO this year. We are a 501(c)3 organization. We have been told by previous officers that there are many rules and regs that have to be followed. I have worked for two other 501(c)3 organizations and have not found the rules & regs to be that bad. They have a notebook about two inches thick of materials concerning the application, but can't seem to give us some basic rules. Where can we get these?

  6. Posted by - Craig Bystrynski from PTO Today on Aug. 10, 2009

    Hi Staci,

    There's no limit on how much money you can keep in a savings account. If you have an amount of money you won't be spending for some time, you can even check out certificates of deposit and other safe investments where you might collect a little more interest.

    Craig

  7. Posted by - Staci Page on Aug. 08, 2009

    How much money can be held in a savings account by PTO (501C3)?
    Thanks so much!

  8. Posted by - Tim Sullivan (PTO Today) on May. 07, 2009

    A few answers to various questions posted here:

    RE: end-of-year. There is no rule that you have to spend all your money each year. In fact, it's a good practice to maintain some cushion. I think it's nice when groups can start the year with service and involvement events, as opposed to being forced to start only with fundraisers to fill empty coffers.

    The IRS restricts just what not-for-profits can do with their excess funds (can't go to individuals), not when you have to spend those funds.

    RE: PTO v PTA. Check out the PTO v PTA link at the very bottom of this page. Tons of info there.

    Tim

  9. Posted by - Kasey Repass on May. 07, 2009

    I have the same question as Jean S on Jan 26th above...anyone know if you have to break even or if you can carry over a profit from year to year?

  10. Posted by - Liz on Feb. 26, 2009

    Our group is looking for any information available on switching from a PTA to a PTO. We already have 501(c)(3) tax-exempt status for our group. Does anyone have specific information on the exact steps we need to take when our group changes organizations? When I contacted the IRS they told me that I needed to contact PTO for the information.

  11. Posted by - John on Jan. 27, 2009

    Our Private School PTO was formed 50+ years ago. It used the same employer ID as the Corporation (Church). Having done so, can the Church use PTO funds legally, to keep from having to close the School due to low enrollment? They need the money from the PTO to pay salaries and expenses or may have to close the School in June or sooner.

  12. Posted by - Jean S on Jan. 26, 2009

    As a not-for-profit, are you required to manage your income and expenses so that, for the most part, you break-even every year? Is it proper to show a substantial amount of net income? Otherwise, aren't you taking advantage of the donors if you solicit contributions when you aren't spending the money?

  13. Posted by - George on Dec. 13, 2008

    We are putting the final touchs on our Form 1023. We are looking at running a program to reduce tuition for needy families. This situation would commonly be called a scholarship but it appears if we call it a scholarship program, we have to complete Schedule H. We are talking about a couple of thousand dollars total so Schdule H seems like overkill. The PTO start up toolkit, page 34, para 13.f.i.ii mentions "a mini-grant (or similar) program". I do not recall another mention of a mini-grant program. I am wondering if a mini-grant program would encompass what we are trying to do.
    Couple of questions:
    What is a mini grant program?
    Does anyone (with approved 501(c)(3) status) run a "needs based" scholarship program without completing Schedule H? If yes, how do you do it, what do you call it.

    Thanks in advance for any assistance.

  14. Posted by - Mary on Dec. 07, 2008

    I have been doing gift wrapping in Borders Store for 2 years, in order to raise some fund for my Organization. This year they told me I can't do it again because I don't have 501(c)3. Where is the problem? They said that officially I can be in trouble, why? They provide me with the material and people donate in the donation box after I gift wrap their books.

  15. Posted by - Mary on Nov. 25, 2008

    Our organization never applied for tax exempt status as we were tax exempt by statute (under 5,000 income). But we may soon be over that amount. I was told today by someone at the IRS that we could possibly be included as tax exempt under PTO Congress of Illinois group exemption , does anyone know about this?

  16. Posted by - Craig Bystrynski from PTO Today on Nov. 07, 2008

    Anita -- Parent groups generally don't have to pay sales tax on fundraiser items in California. You'll find specific language in this pdf from the State Board of Equalization, pages 27-28.http://www.boe.ca.gov/pdf/pub18.pdf -- Craig

  17. Posted by - Anita on Nov. 03, 2008

    If we are a tax-exempt PTO, do we have to pay taxes on fundraiser items? We have a tax ID # but I am being told by the fundraiser company that we still have to pay taxes. We are in California if that makes a difference.

  18. Posted by - Craig Bystrynski from PTO Today on Oct. 30, 2008

    Cheryl -- Applying for 501c3 is time-consuming, no doubt about it. I strongly recommend that you get our PTO Start-up Toolkit. It walks you through the application process step by step and the application form line by line. We spent many hours talking with the IRS to put it together. It will save you a lot of effort. Here's the link: http://www.ptotoday.com/startup-guide -- Craig

  19. Posted by - cheryl perry on Oct. 23, 2008

    Hi our pto council is now looking into filing 5013c we have diffrence people trying to tell us all the long hard things about filing . please advise us on doing this matter we need help very fast and soon please . that's something that as a council we want to see happen for the council

  20. Posted by - PricklyPear on Oct. 01, 2008

    4) The only way to prevent embezzlement, IMO, is with open disclosure and a competent treasurer, and religious adherence to organization rules (receipts, disclosure, etc.). An employee of the school district can be just as crooked as a volunteer.
    5) How exactly is a school to protect the funds? Funds are "safe" in an insured bank account. School discretion to spending and safety are two different things.
    6) Have no idea about schools requesting to freeze funds. I'm sure procedure for freeze, seizure, and award are dealt with on a state and federal level and laid out in articles, bylaws etc.
    7) Bylaws/articles determine officers (or lack of), financials, etc.
    8) 501's have the right to give their money to any other 501 (could be the school or another group).

  21. Posted by - PricklyPear on Oct. 01, 2008

    To Michelle -

    Good questions, I am asking many of them myself. Here are my observations and I'd love your thoughts.

    1) having 501 status can help by legitimizing your organization with donors and the community, and if you don't want to pay taxes (while remaining legal to state and federal laws it appears the way to go.
    2)I have no idea about liability of officers; however, I can't see it increasing it since corporations generally protect from liability. Insurance coverage can cover the organization and it's officers (and volunteers) fully, I believe. There may be civil liability, but I assume that won't increase or decrease with incorporation/501 status.
    3)People make bad decisions, and your bylaws and articles should deal with that (or procedures in absence of either).

  22. Posted by - Michelle Dowd on Sep. 30, 2008

    Besides allowing donors tax exempt donations, how does becoming a 501 c 3 organization really help a PTO? It seems pretty expensive ($750). Does it open up officers to liability if sued, forcing them to become incorported for their own protection? Most groups have parents involved for 2 year terms. Without school oversight, what's to prevent new members from making poor budget decisions and spending irresponsibly if schools do not have final say over spending? Is it easier to prevent embezzlement if the PTO bank account held by the school? Why not allow the schools to help protect the hard earned funds? Can schools access or freeze the funds of a 501 c 3 PTO if things have gone amiss with the group? Or, are the funds untouchable by the school, no matter what happens, with a 501 c 3 gropu? What if no one steps up to be treasurer? Who would be in charge of the bank account? What becomes of the funds if the 501 c 3 PTO dissolves?

  23. Posted by - ann wilson on Sep. 26, 2008

    We need help right away!
    We have been a very successful PTO for years now, we knew nothing about being a 501 c 3 organization. We have always had a seperate account from the school.
    This year the school has a new principal.
    She is very heavy handed and insists we put all our money in the school account.
    As a PTO we do not like this idea, and have been researching about becoming a 501 c 3 organzation. The principal is not giving us enough time, she has insisted that we hold a vote this Monday September 29,2008. She also has stated that we cannot table the vote until we can gather futher information. I need something to tell the other parents before the vote. Please help soon
    Ann Wilson

  24. Posted by - Craig Bystrynski from PTO Today on Sep. 23, 2008

    Hi Crystal--Lots and lots of groups don't have 501c3 status. I'm not aware of the IRS going after a parent group for taxes because it's not a registered 501c3 group. If you function like a typical PTO -- fundraise in the typical ways, spend the money you raise to support your mission, don't pay your officers, etc. -- you're probably not at much risk. (Note that this is not a legal opinion, just an observation.) On the other hand, the IRS only allows tax deductions for contributions made to registered 501c3 charities. So if you're not registered, donations can't be deducted. -- Craig

  25. Posted by - jac on Sep. 19, 2008

    The bylaws state that they don't have to meet regularly and they can appoint officers. I was just hoping the 501c3 might have guidelines about it. It is definetly 501c3, the principal and school board can't make them hold elections. 3/4 of the board don't have kids at our school. They have been running it for many years. Thanks anyway.

  26. Posted by - Craig Bystrynski from PTO Today on Sep. 19, 2008

    Jac, The organizational issues you're referring to are covered by bylaws. They're not related to a 501c3 filing (the IRS doesn't ask for them), but they are important. Get a copy of your group's bylaws, and speak up if they're not being followed. Are you sure your group is 501c3? It's not uncommon for new leaders to assume a group has that status, but no application has actually been filed. You can find out for sure by calling the IRS at 1-877-829-550. Ask the rep to check Publication 78, which is a list of all 501c3 groups. -- Craig

  27. Posted by - Jac on Sep. 19, 2008

    As a 501c3 do you have certain guidelines you have to follow? Do you have to have a meeting once a month (or so) and invite all PTO members? Do you have to hold elections for board members? I'm asking because our PTO is a 501c3 and they have done none of the above in 3 years.

  28. Posted by - Crystal on Sep. 18, 2008

    If our PTO does NOT want to file for 501c3 status then what can we legally do to raise money? Can we still take donations, even if they are not tax deductable? Can we still take in revenue from fundraisers? Do we need to pay taxes on what we earn from fundraisers even though we will use the money to benefit the school? Yes That's what I need to know too.

  29. Posted by - Crystal on Sep. 17, 2008

    If we do not have a 501 c than the people who make donations to us are not able to claim this as a tax deduction?

  30. Posted by - Craig Bystrynski from PTO Today on Sep. 08, 2008

    Hi Debbie, If your group is simply a committee of the school, you may be tax-exempt under the school's umbrella. However, most parent groups are independent organizations. If you have your own bank account and number and control your own money, you are probably independent. In that case, your group must file with the IRS under section 501(c)(3) to be considered truly tax-exempt. -- Craig

  31. Posted by - Debbie on Sep. 06, 2008

    I am the newly elected chair for our PTO. We are a Christian School with what everyone thought was a tax-exempt status. But now I am wondering if we should also be incorporating and filing a 501c3? Is a school run by a church truly an exempt in this situation as a PTO group? Thanks!

  32. Posted by - Kathryn Lagden from PTO Today on Sep. 03, 2008

    Hi Karrie - Have you seen our File Exchange section? Great spot to look for sample documents since anyone can upload and share files.

    I know there are sample articles of incorporation in the Plus members section but you need to be a Plus member to access - http://www.ptotoday.com/filesharing/category/58-plus-members

    We recently set up an area on our message boards for folks to request documents they couldn't find in the File Exchange. Suggest you repost your question here - http://www.ptotoday.com/boards/file-exchange-wanted-uploaded-questions/

  33. Posted by - Karrie on Sep. 03, 2008

    Oops! Just in case someone is willing to help here is my email address thecurlclan@hotmail.com
    Thanks!

  34. Posted by - Karrie on Sep. 03, 2008

    Can some please send me a copy of their Articles of Association, I am struggling to write ours and am not sure of the wording. Any help will be greatly appreciated.

  35. Posted by - Lani Harac, PTO Today on Aug. 04, 2008

    Hi, Laura -- The articles of association (sometimes called articles of incorporation) define the existence of your group; the bylaws determine how your group will be run. If your group incorporates (which we recommend), your state will probably require some form of defining document. If you do not incorporate, chances are you'll only need the bylaws. --Lani

  36. Posted by - Laura Wiseman on Jul. 05, 2008

    What documents are really necessary? Bylaws and Articles of Association?
    or just Bylaws

  37. Posted by - Craig Bystrynski from PTO Today on Apr. 18, 2008

    Hi Beverly--I don't know of any that are structured that way. I'd suggest contacting an attorney or the IRS tax-exempt helpline at 877-829-5500. (Despite their reputation, we've found the IRS to be quite helpful.)--Craig

  38. Posted by - Beverly on Apr. 18, 2008

    I was wondering if the PTO can further be classified as a 509a3 supporting organization?

  39. Posted by - Denise on Apr. 08, 2008

    FYI, I just completed the filing of Form 1023 almost everything you said was dead on, by the prices have gone up $750 for larger budgets (over $10,000 annually) or $300 for smaller budgets

  40. Posted by - Kathryn Lagden from PTO Today on Mar. 25, 2008

    Some good comments/questions here. Our message boards are a good spot to ask questions that are specific to your group. Lots of knowledgeable and experienced folks on the boards and our PTO Today experts regularly jump in with their insight as well.

    The boards are at www.ptotoday.com/boards. Select a category and then click "New Topic" to post your own question. Also suggest you use the 'search' link (left hand column) to see other discussions related to your question. If you need any help email me at klagden (at) ptotoday (dot) com

  41. Posted by - mami 1978 on Mar. 24, 2008

    I have a question, in the above article about being incorporated , if i am one of the officer of the pto, do each of the officers have to fill out this form seperately and also have it documented with our personal accountant? or am i missing something. I honestly do not want to be a corporation, i thought that we can establish our bylaws and use the school tax id for our purchases and every month give the report tot he board member so that they can see what is going on iwht the spending and receiving of funds and we would be fine. Am i really foolish for thinking this way ?

  42. Posted by - Kristy on Mar. 06, 2008

    Christy,
    We are currently under the school (charter school) which is run by a for profit company and we are a non-profit group. This sounds like a conflict to me and that we should have our own Tax ID number, 501 (c) (3) status. Our school board (one member) is over seeing us with a heavy hand. What is your opinion?
    Thank you.

  43. Posted by - Siobhan on Mar. 04, 2008

    Hi Christy --
    GREAT article! I am a first year PTO president. I know our school is 501(c)(3) but I am unsure if we are incorporated. How do I find that out?

  44. Posted by - Christy Forhan on Feb. 24, 2008

    It's always good practice to get some form of receipt: a copy of the assembly contract or even a note signed by your principal accepting the $donation from your PTO. Keep with the corresponding transaction form. We sometimes pay the vendor directly, but sometimes its easier for the school to place an order using their district PO system, and then we'll reimburse the school (get a copy of the invoice). We budget specific amount$ that the principal controls for general categories (ex: building extras). We give him the $ when he spends it, not "just because".

  45. Posted by - Teri H. on Feb. 17, 2008

    Hi Christy,

    I would like some more information from you. Did you require your school to provide receipts for all purchases made with PTO funds? or did your PTO pay the vendor directly?

    Our school had not in the past provided these receipts so when I became Treasurer, I started asking, but was up against a little resistance.

    Do PTO's in your city give monies directly to the school or just product?

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