Taxes, 501(c)(3) Status, and Incorporation
We’ve never filed a tax return. Now what?
What if we haven’t filed returns for a few years?
If a PTO changes its name, does it have to do anything with the IRS?
For group tax-exemption, can subordinate members file the 990-N individually?
Are we required to file a 1099 for a presenter coming to the school (such as an author visit)?
Donations and Reimbursements
Can one 501(c)(3) donate to another 501(c)(3)?
Can a school parent group be a 501(c)(3) organization if it’s associated with a for-profit school?
Should we reimburse parents for the full amount they paid or withhold the sales tax?
Are there any tax implications for gifting equipment rather than money to our school?
“EIN” is short for “employer identification number.” It’s the number the IRS issues to keep track of businesses, including tax-exempt organizations. Despite the name, it has nothing to do with whether you have employees.
There are a couple of different ways for parent groups to organize. You can function as a committee of the school, using a school bank account and the school’s tax-exempt umbrella. Or you can be an independent organization, which typically gives you more say over your own operations and finances.
Any independent PTO needs an EIN to set up a bank account. In fact, banks won’t let you open a business account without either an EIN or a social security number, and you should never use a personal social security number to open an account for your PTO.
Luckily, it’s quick and easy to get an EIN using the “Apply for an EIN Online” page on the IRS website. (You can also request an EIN by phone—call 800-829-4933 during business hours—or by filling out IRS Form SS-4 and mailing it in.
Your group should have a computer-generated notice issued by the IRS that lists your EIN. If you don’t know the number and can’t find the form, check with your bank manager for help. The bank account your group uses was set up with either an EIN or, if your PTO is banking with a personal account, a social security number. If you find that your PTO is banking under a social security number, it’s important to get an EIN for your PTO and then move your account to a business account, which will be structured better for your needs.
If you still can’t locate your EIN, call the IRS business and specialty tax line at 800-829-4933 for help.
Taxes, 501(c)(3) Status, and Incorporation
If your PTO is independent from the school and earns and spends funds then it is, in essence, a business that technically should be filing an annual IRS return (and possibly state or local-level forms, as well). Fortunately, PTOs fit the IRS criteria to become a tax-exempt public charity. The common shorthand for this is “501(c)(3) organization” because the exemption is spelled out under section 501(c)(3) of the federal tax code.
To get official federal tax-exempt status, you must file IRS Form 1023-EZ. This is a time-consuming process and will cost your PTO a one-time fee of $275. As an exempt organization, your PTO will still need to file an annual return with information about your income and expenses, but you don’t need to pay federal income taxes.
No. These are two different and unrelated steps. Incorporation is recognized at the state level, and 501(c)(3) is a federal designation. Incorporation usually offers your PTO and its officers some protection from certain kinds of liability, and it often allows you to become exempt from state income and sales taxes. Typically, incorporation must be renewed annually with your state’s department of commerce or with a similar office.
Incorporation establishes the inception date of your organization, so you should incorporate before you file for federal tax-exempt status. If you decide to incorporate after you get your 501(c)(3) designation, you’ll have to redo the entire tax-exemption process because, in the eyes of the IRS, the newly incorporated organization is a brand-new entity.
For more information about incorporation, get our free guide called How To Incorporate a School PTO.
No. But your PTO must file Form 990-N or 990-EZ, the annual IRS information return, on time every year.
The application for 501(c)(3) designation is called IRS Form 1023; most PTOs will be able to use the shorter Form 1023-EZ to apply. The current one-time fee for applying for tax exemption is $275 if you use Form 1023-EZ, and $600 for Form 1023. Form 1023-EZ and Form 1023 instructions can be downloaded from the IRS website. PTO Today’s detailed, line-by-line Startup Toolkit is specifically designed to walk PTO leaders through Form 1023 and Form 1023-EZ.
If your group hasn’t been filing returns, use the Tax Exempt Organization Search (see “Check Your Status” at the bottom) to determine whether your group is a registered 501(c)(3) organization. If not, and you want to begin the process of becoming one, download Form 1023-EZ from the IRS website. This form is fairly involved, but you can get help from PTO Today’s Startup Toolkit, which walks you through the application question by question.
Many independent PTOs do operate without official tax-exempt status. However, the IRS has said that it wants all small nonprofits to register as 501(c)(3) organizations, and it has created a two-tier fee system and simplified the reporting process to make it easier to comply.
The IRS information return for tax-exempt organizations is Form 990. Most parent groups file Form 990-N, a simple postcard. If your gross income for the year is more than $50,000, you’ll file Form 990-EZ, a more detailed version of the return. Read “Tackling Your PTO Tax Return” for more information.
If your group has federal tax-exempt status but hasn’t been filing returns, don’t panic. Your next step depends on how many years you’ve missed and what your gross annual income is.
If you’ve missed only one or two years of annual returns and your PTO takes in $50,000 or less in gross receipts each year, you just need to file this year’s report, Form 990-N, on time. It’s due by the 15th day of the fifth month after the close of your PTO’s fiscal year (Nov. 15 if your fiscal year ends June 30, for example). Form 990-N is filed electronically, and it’s only 10 questions. If you’ve missed only one or two years, you don’t need to submit the missing reports, but you do want to establish good record-keeping practices and financial controls to ensure that your group doesn’t miss future deadlines.
If your 501(c)(3) PTO earns more than $50,000 in gross receipts each year, then you must file Form 990-EZ instead of 990-N. It’s a bigger deal to the IRS if a group your size forgets to file the return; your PTO might be subject to late filing fines. If you’ve missed filing Form 990-EZ, call the IRS at 877-829-5500 and discuss your specific situation. Don’t wait. The IRS has been known to waive or reduce late filing fines, but you must act with sincere effort to correct the situation.
If you know your PTO is, or was, a 501(c)(3) organization and you’ve missed three consecutive years or more of annual returns, then the IRS has most likely revoked your group’s tax-exempt status. Use the IRS’s Tax Exempt Organization Search system for automatically revoked organizations. If your PTO shows up on the list, your group’s tax-exempt status has been revoked and you’ll need to take steps to reinstate it.
The IRS isn’t interested in squeezing penalties out of well-meaning but organizationally challenged charitable organizations like school PTOs. Unfortunately, it’s just as much work to file for reinstatement as it is to file for tax exemption in the first place. In fact, your PTO would submit Form 1023 along with the standard $600 application fee to request reinstatement.
You’d also need to submit the missing annual returns using Form 990-EZ instead of the easier 990-N. The benefit of reinstatement versus creating a brand-new entity is that your PTO would retain its same EIN, and all history of your group stays intact.
Yes, but it’s pretty straightforward!
If you’re going to file Form 990-EZ (or Form 990) by mail, you can check the box for “name change” in the header area. You’ll also need to include a copy of your amended articles of incorporation or other organizing document, and—if you’re incorporated—proof that the name change was filed with your appropriate state-level office.
If you’re going to file Form 990-N, or if you don’t want to wait until your next Form 990-EZ is filed, or if you plan to e-file your Form 990-EZ, you can mail or fax a letter to the IRS that reports your name change. The letter should include:
Your group’s original full name
The new full name
A signature from one of your primary officers (usually the president, vice president, or treasurer)
In the same letter, you can request a new determination letter (sometimes called an affirmation letter) to confirm that your organization with its new name is a 501(c)(3) group. You’ll also need to include a copy of your amended articles of incorporation or other organizing document, and—if you’re incorporated—proof that the name change was filed with your appropriate state-level office.
For a group 501(c)(3), can all of the subordinate members (PTOs at each school in the district) file the 990-N individually? Can the central organization (the district PTO) file a 990-N, also?
The short answer is yes: Under certain conditions, the subordinate organizations and the parent organization can file their 990-N’s individually.
For the long answer, let’s break down those “certain conditions” into individual points:
If a subordinate organization qualifies to complete the Form 990-N and the parent organization isn’t including it in a group return, then the subordinate organization can file its 990-N individually. It would need to use its own EIN in this case.
The parent organization itself can’t be included in a group return; it has to file its own return separately. This can be done with Form 990-N (if the parent organization qualifies to use it), Form 990-EZ, or the full-length Form 990.
Only Form 990 can be used for a group return. For the parent organization to include a subordinate organization in a group return, the subordinate organization has to provide written permission each year to be included. The group return can be filed for some or all of the subordinate organizations.
Subordinate organizations included in a group return shouldn’t file their own returns separately; basically, a subordinate organization is relieved of the responsibility of filing its own return if it’s included in a group return.
(If your PTO has less than $50,000 in gross receipts, it can file Form 990-N; if gross receipts are less than $200,000, it can file Form 990-EZ.)
The IRS has lots of different versions of Form 1099, which are all used to report income other than a regular salary. For a school presenter like an author or enrichment entertainer, you’ll most likely use Form 1099-MISC.
Your group should provide Form 1099-MISC to anyone who’s been paid $600 or more over the course of the year for services provided to your group. This $600 includes parts and materials, too—so if, for example, you pay a science enrichment provider $400 to run a workshop and a separate fee of $250 for supplies used by students during the workshop, the total amount paid is $650 and your group would need to provide Form 1099-MISC.
Before completing Form 1099-MISC, you’ll need to get Form W-9 from the presenter; this shows the official business name, address, and EIN, which you’ll use to complete Form 1099-MISC.
As always, there are exceptions! No Form 1099 is required in the following cases:
You paid the school performer less than $600 during the year.
The school performer is incorporated as a business entity.
You paid with a credit card or third-party network, such as PayPal.
If you’re still not sure what your legal obligations are, remember this: There’s no penalty for providing a 1099-MISC even if you’re not required to.
Donations and Reimbursements
Absolutely, as long as the other federally tax-exempt organization has a similar mission to yours! For example, if your PTO’s mission is to “enrich the lives of students and support the work of teachers at ABC Elementary,” then you could donate money to your school.
On the other hand, the animal shelter a few blocks away might also have federal tax-exempt status—but because its mission wouldn’t help advance your group’s mission, you shouldn’t donate PTO funds to it.
Generally speaking, a 501(c)(3) organization isn’t allowed to contribute to (or on behalf of) a for-profit organization. To be federally recognized as a federally tax-exempt group, your PTO agreed to reinvest its money into the services it provides as part of its mission, or to donate that money to other tax-exempt groups with a similar mission. If the tax-exempt parent group is organized by the same people who own or run the for-profit school, this can become an even stickier legal situation for everyone involved.
In the case of a religious school, however, the school itself might be tax-exempt—which means it might be able to accept donations from other tax-exempt organizations, like a PTO. This adds more complication, so if this is your situation, call the IRS and ask about the best way to move forward.
Our PTO is exempt from sales tax in our state. Sometimes parents buy items for us, and we reimburse them. If the parents don’t have documentation that we’re sales tax-exempt and their purchases are taxed, should we reimburse them the full amount or withhold the amount they paid in sales tax?
Your group could choose to hold the parents responsible for the sales tax, but that policy seems almost certain to alienate your volunteer shoppers. If paying unnecessary sales tax is a repeat problem, try to figure out the root of the problem instead:
Your volunteer shoppers don’t know what the PTO’s sales tax-exemption status is, or they don’t have the right documentation available when they shop. To solve this, make copies of your sales tax exemption certificate or other necessary paperwork readily available in hard copy or online.
Your volunteer shoppers feel awkward taking extra time in the checkout line. To overcome this, pair up newer shoppers with old pros so they can see how the process goes.
Your volunteer shoppers know what they’re supposed to do but just won’t do it. If this is happening within your group, use these volunteers in a role other than shopping—or make peace with the extra money that gets spent on sales tax.
Remember that your shoppers are doing a favor for the PTO by purchasing the products and spending their own money out of pocket. If you want to stretch your group’s dollars by skipping the sales tax, the responsibility for making that transaction go well lies with your group’s leaders.
We raised $50,000 for air conditioners for the school. Typically, we would donate the money to the school and then they would purchase the equipment, but the vendor has asked us to pay and then give the equipment to the school as a gift. Are there any tax implications we should be aware of?
You can donate the money or donate the equipment; either way is fine. At PTO Today, however, our Leader Support staff members always recommend purchasing equipment and then officially gifting it to the school. By handling it this way rather than donating the cash directly, there are a few benefits:
You ensure that the money is being spent the way it was intended. If your group raises money specifically for those air conditioners and donates the cash to the school, and then a different problem crops up that the principal or superintendent wants to repair first, the money will be out of your PTO’s control.
Gifting the equipment to the school reduces your group’s liability. After purchasing the air conditioners, you would present them to the principal with a formal letter transferring ownership. If anything goes wrong with the units, they wouldn’t affect your insurance because they no longer belong to your group.
Gifting the equipment reduces your tax burden. Because they belong to the school immediately after purchase, your group will not need to count the air conditioners as an asset for tax reporting purposes.
The IRS has developed a tool that makes it easier to research your PTO’s status. It’s called the Tax Exempt Organization Search, and it offers quick access to several different searches:
Organizations eligible to receive tax-deductible charitable contributions (Pub 78 data)
Automatically revoked organizations
Determination letters dated on or after January 1, 2014 (note that this search isn’t comprehensive yet, but according to the IRS all letters since January 2014 will be “available soon”).
Organizations that have filed Form 990-N
Organizations that have filed other Form 990 series returns
Originally posted in 2013 and updated regularly. Christy Forhan and John Taylor contributed to this article. Christy Forhan served as treasurer over many years for school parent groups in Michigan. John Taylor, a CPA who focuses on accounting for Massachusetts businesses, is the PTO treasurer at Beverly (Mass.) Middle School.