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Taxes, PTOs, and the IRS

Questions about tax-exemption? Get the scoop on 501(c)(3).

by Christy Forhan

March 2011

Does your group have 501(c)(3) status? If you’ve heard that phrase before and don’t know what it means, you’re not alone. “501(c)(3)” is IRS-speak for being tax-exempt. It refers to a section, subsection, and paragraph of the federal tax code. Section 501(c)(3) lists many types of organizations that are exempt from paying certain federal taxes, including those established for charitable or educational purposes like most PTOs.

Just because your group acts like a nonprofit, however, doesn’t mean it’s automatically exempt from taxes. Obtaining tax-exempt status under section 501(c)(3) involves a fairly lengthy application process. Should you apply? In most cases, the answer is yes.

Why Apply?

There are several advantages to having 501(c)(3) status, including:

Tax-exemption. Registering as a 501(c)(3) organization makes your group exempt from income tax for all activities relating to your mission. In many states, federally registered 501(c)(3) organizations are exempt from state sales tax, as well. Check with your state’s department of commerce for details.

Credibility. An organization with 501(c)(3) status demonstrates to the greater community that it takes itself and its work seriously. It has its bylaws, policies, mission, programs, records, and finances in place as required by the IRS. While there’s no guarantee that a registered PTO will be well-managed in the years ahead, the status does establish a foundation of professionalism and legitimacy that can draw new members and donors to your PTO.

Donations. Essentially, for a supporter to claim a donation to your PTO as a tax deduction, your group must be a federally registered 501(c)(3) organization. This is especially important if you solicit donations for an event like an auction or carnival. Many vendors will donate only if your PTO has 501(c)(3) status.

Grants. Most grant programs require their applicants, including PTOs, to be federally registered as 501(c)(3) organizations.

Responsibilities

Along with the benefits of 501(c)(3) status come responsibilities. Every year, your PTO must file an annual information return, similar to a tax return. Form 990 (or 990-EZ) asks about the sources of your group’s income and what types of expenses were incurred in the previous year. Most of the questions are financial in nature, so your treasurer should keep detailed records all year. Starting with the 2010 tax year, groups collecting $50,000 or less in gross receipts instead may file Form 990-N, the simplified "e-postcard."

The IRS gives you several months after the end of your fiscal year to complete Form 990, but you must meet the deadline. Failure to file the form could result in hefty fines. Also, a 501(c)(3) PTO must send the names of newly elected officers and substantial bylaws revisions so that federal records stay up to date.

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Not every parent group has the infrastructure or organizational maturity to fulfill these annual obligations. Consider your group’s long-range viability when discussing 501(c)(3) status. If you move forward with the application, be certain that your officers, especially your treasurer, keep good records now and into the future. Pass down the knowledge to next year’s leaders. Once your PTO becomes a 501(c)(3) organization, it moves to a new level of professionalism that must be maintained year after year.

How To Apply

Before your PTO can apply for 501(c)(3) status, it must be given a federal identification number. This number is called the employer identification number, or EIN. It functions like a social security number for your business. There is no cost for an EIN, and the application, form SS-4, can be completed with a telephone call to the IRS. Even if your PTO never files for 501(c)(3) status, you need your own EIN to open a bank account in the PTO’s name.

The next recommended step is to incorporate your PTO in your state. Incorporation is not required, but it provides some liability protection for officers. The incorporation most likely will have to be renewed each year. Rules and fees vary from state to state. Typically the department of commerce can provide details.

The application to become a 501(c)(3) group is IRS form 1023. Admittedly, it is long and intimidating. However, many PTO volunteers have successfully completed the application process without the aid of outside professionals. IRS telephone agents are readily available to answer questions about the application. PTO Today’s Start-Up Toolkit includes a step-by-step guide to form 1023, written specifically for PTOs.

The IRS requires a one-time application fee of $400 or $850, depending on your group’s annual revenue. It usually takes six to eight weeks for the IRS to approve an application. When your application is accepted, the IRS sends you official proof of 501(c)(3) status, called the “determination letter.” Considering all the work you put into completing form 1023, the determination letter is a rather dull-looking document. No fancy seal or gold ribbon; nothing that’s suitable for framing. But you should protect the original determination letter and distribute several copies for safekeeping. This is the proof you’ll need when a potential donor or grantmaker asks for evidence of your 501(c)(3) status.

Myths About 501(c)(3)

There are a handful of misconceptions that prevent groups from applying for tax-exempt status.

Our PTO is tax-exempt automatically because the PTO is related to our public school. This is true only if your PTO operates as a committee or club entirely under the school’s direct control. If your group’s money is held in a bank account owned by the school, using the school’s EIN, then your PTO is a committee of the school. In this case, you could argue that your PTO is covered by the school’s tax-exempt status. However, such a tight relationship sacrifices the independence that many PTOs desire.

If we have 501(c)(3) status, we have to spend our account down to zero every year. Not true. The IRS allows 501(c)(3) organizations to carry over as much money as its members see fit. You can also make and hold profit on any of your activities. “Nonprofit” means you can’t have shareholders who take money from the business, as a for-profit company does. It doesn’t prevent the group from making money to further its mission.

Our PTO is too small to bother with filing for 501(c)(3) status. The IRS expects any PTO that regularly raises at least $5,000 of gross income each year to file for 501(c)(3) status. Note that the test is based on gross income, not net profit. If your PTO exceeds the $5,000 test, you should seriously consider filing. Otherwise, your PTO is a small business to the IRS and could be subject to federal tax on your group’s income.

We have our own tax ID number, so we are tax-exempt. Getting an EIN is just the first step in becoming an officially registered tax-exempt organization. If you cannot find proof that the PTO ever filed form 1023, the application for tax-exempt status, and you have never heard of form 990, your group probably does not have 501(c)(3) status. Contact the IRS at 800-829-3676 to find out for sure.

Making a Decision

Now that you have a basic knowledge of 501(c)(3) status, is it right for your PTO? That’s for your executive board and members to decide. More information can be found at www.irs.gov, in the PTO Today Startup Toolkit, and in the Bylaws/Nonprofit resources section on ptotoday.com.

Christy Forhan is a veteran PTO leader who has served as president and treasurer, among other roles, at schools in West Bloomfield, Mich.

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Comments

  1. avatar

    Posted by Craig on Mar. 19, 2013

    Many, if not most, states accept the federal form and don't require you to file an additional state form. I believe Maryland falls into that category. However, you do need to apply to the Maryland Legal Department of Revenue Administration Division to establish your tax exemption. If you haven't done that yet, you'll need to send them:

    * An explanation of your group's purpose
    * A copy of your bylaws
    * A copy of your IRS 501c3 determination letter
    * A copy of your most recent financial statement

    Here's a link to more information:
    http://www.sos.state.md.us/charity/non-profit.aspx
  2. Posted by - Sandy on Mar. 18, 2013

    Hello,

    Our PTO started last year and we filed an e-postcard for Federal taxes. We just received a form for Maryland state taxes. Do we need to file those?
  3. Posted by - Theresa on Mar. 13, 2013

    I live in PA and was recently elected the new pto Pres for the next school year. We have 2 elementary schools, only 1 has tax expemt status. All 3 schools are merging into 1 and the name of the school is changing. Is it possible to transfer the tax exempt status to the new name?
  4. Posted by - Jamie on Oct. 27, 2011

    What if our PTO raises less than $5000 per year? Can we operate "as if" we were tax exempt (re: fundraising... can we sell items for a fundraiser but not worry that we don't have tax-exempt status?)

    We are such a small PTO and small school that the filing fee would deplete almost our yearly budget for activities for the kids. I think we typically take in about $2000 per year.
  5. Posted by - Moon Mullins on Mar. 24, 2009

    We raise about 5,000 a year.....we spend it all on the school which is a tax exempt organization (DOD School) and carry a very small balance forward. I see no advantage to spending 300 bucks to have this tax exempt status. Couple that with the accounting and filing requirements.....I have no confidence that we have anyone in our group that could do the forms. This is a losing proposition in my estimation.....why am I wrong..
  6. Posted by - Nicole Skinner on Jan. 29, 2009

    We are thinking about switching from a PTA to PTO, do we have to re-file with the IRS for tax exempt status or can we just make a name change with the IRS?
  7. Posted by - Carolyn Grant on Jan. 16, 2009

    We are filing taxes for the first time as a PTO. We have
    gotten tax-exempt status under 501(c)3. Are we filing
    a separate return covered by a group ruling (as was the
    case when we were a PTA)? Or are we filing as an
    individual entity this time?
  8. Posted by - Sherry on Dec. 09, 2008

    Our PTO has been using the school's EIN. Do we need our own? If we have our own what are the tax implications? We raise about $20,000 per year and pretty much spend it all on the school. If we use the School's EIN and we have collected "free money" coupons (box tops, soup cans labels etc) do we have to give that money over to the school? Thanks for your input.
  9. Posted by - kiki on Nov. 19, 2008

    If we are recognized as a 501 B are we required to show all money on our teasurer's report. We raise money a year in advance and carry it forward. Budgets are tight and our school is very economically diverse. Extra monies carried forward have not been disclosed, as to not discourage people from fundraising. Is this right or more importantly legal?
  10. Posted by - Craig Bystrynski from PTO Today on Oct. 22, 2008

    Hi Danielle -- The fundraising company is asking about sales tax. Sales tax is regulated by the state, not the IRS. You'll need to check with your state's tax or corporations office to make sure you are exempt from sales tax. Usually, registering for sales tax exemption is a fairly simple process. Good luck. -- Craig
  11. Posted by - Danielle on Oct. 22, 2008

    As a PTA we completed a catalogue fundraiser. THe company is now asking us to sign a tax exempt form or pay the taxes. If we sign this form will it cause problems with the IRS when we file?
  12. Posted by - Craig Bystrynski from PTO Today on Oct. 10, 2008

    Hi Maria -- 501c4 is for civic leagues and social welfare organizations. A homeowners association would be 501c4, as would a volunteer fire department. One big difference, I believe, is that contributions to 501c4 organizations are not tax deductible. I'd recommend talking to the IRS to see what they recommend. Despite their reputation, IRS folks can be quite helpful. Use the number for nonprofit organizations: 1-877-829-5500. Good luck! -- Craig
  13. Posted by - Maria on Oct. 02, 2008

    What is the difference between 501(c)(3) and a 501(c)(4) Our previous treasurer had us filed under that (which we just found out about) Can we switch?
  14. Posted by - Craig Bystrynski from PTO Today on Sep. 29, 2008

    Nana -- That's a complex issue, but I'll cover a few of the basics. Please note that this isn't legal advice -- just our observation of situations like yours. First, it's best if you contact the IRS rather than wait until you are contacted by them. They will ask you to file the back returns -- how hard that is depends on whether your past financial records are in order or not. You will be subject to fairly significant fines. However, you may apply for an abatement. In most cases we've heard about, the fines have eventually been waived. It takes time and effort, but you can work this out. If you post your question on the message boards, you're likely to hear from others who have been through the process. http://www.ptotoday.com/boards/ Good luck! -- Craig
  15. Posted by - Nana on Sep. 28, 2008

    I am on the 2008-2009 PTA board at our school We just discovered that our PTA never filed with the IRS since it began in 2001. Our treasurer is about to file prior to Nov. 15th. Should we file for the other years? Our previous presidents and treasurers never bothered to look at their kit of materials. We did and apparently we have opened a can of worms.
  16. Posted by - Craig Bystrynski from PTO Today on Sep. 22, 2008

    Hi Carole -- There's no downside to being tax-exempt, and you can certainly carry a balance forward from year to year. Larger nonprofits do this as a standard business practice, and you can, too. You do have to make sure to file your annual IRS return (Form 990) and keep the IRS updated when your officers change. The article "Tackling Your PTO Tax Return" has some helpful information: http://www.ptotoday.com/pto-today-articles/article/392 -- Craig
  17. Posted by - WI Mom on Sep. 21, 2008

    Question. I have never heard of such a thing before, but our principal is pushing us (our PTO, a legal 501(c)3)) to simply raise money, come up with our budget, and then hand the checkbook, money and all, over to her for HER to maintain. Even if we WANTED to do this (which we don't), would it be legal? My understanding is that, as a 501(c)3, we have to maintain our own spending records, invoices, budget (she would probably not even spend the money the way we have said it should be spent), and general accounting. She literally wants to order supplies and pay for field trips, through our district's accounting system, and then write the school/district checks back from our PTO checking account, herself. I have spent time myself, reading through IRS code (I am not a lawyer!), trying to seize upon some paragraph that i can whip out and show her, that proves we could not even legally do it, even if we wanted to.
  18. Posted by - Carole on Sep. 15, 2008

    Hi! We haven't yet applied for our state's sales tax exemption (Florida), though we do have federal income tax exemption. One of our board members is worried that there might be a downside to being sales tax exempt, and she's heard that we have to be careful if we carry a balance. Is there an article on this issue?
    Thanks!
  19. Posted by - Lani Harac, PTO Today on Aug. 20, 2008

    Hi, Karrie -- Yes, it's possible. Form 1023 is simply the application to obtain 501(c)(3) status. Exemption from sales tax is granted at the state level; regulations vary from state to state, but sales tax exemption is often completely separate from a group's federal nonprofit status.
  20. Posted by - Karrie on Aug. 06, 2008

    Is it possible to have a PTC and not file the 1023? We are cleared through the state to not pay sales tax, but what covers us with federal taxes? Trying to figure this all out after being President and hearing that it is all taken care of but cannot see how we do not have to do a 1023.
  21. Posted by - Sheryl on Jun. 25, 2008

    This article is just what I was looking for. Our PTO has been uncertain about EIN and tax filing information. I will pass this on to our Co-President and Treasurer! Thanks
  22. Posted by - Diane on Feb. 20, 2008

    This brief article has captured all the relevant information that PTO leaders need to know, I think. I've prepared applications for 501(c)(3) status for other organizations, and it is indeed a lengthy process that can be quite difficult if good records are not kept. In my experience with my PTO, I am reluctant to pursue the application because I am not comfortable with the thought of setting up something that other people are going to have to be careful and detailed about. I hope that my successors WILL be careful and detailed, but I don't feel I can count on it. I am going to apply to my state only (NYS) for exemption from the payment of sales tax. It doesn't grant status as a charitable organization that people can deduct their donations to, but it should save us some money.
  23. Posted by - peggy hassler on Feb. 13, 2008

    501c3 tax status information

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