Tax Exemption and Nonprofit Status: What PTOs Should Know


Our guide to the legal terms related to 501(c)(3) status and incorporation for school PTOs and PTAs.


Do “tax exemption,” “501(c)(3),” and “nonprofit” mean the same thing?
People tend to use these terms interchangeably, but they do have distinct definitions. Tax exemption refers to section 501(c)(3) of the federal IRS tax code. Nonprofit refers to incorporation status at the state level.

Does my group have to be both incorporated and tax-exempt?
No. You can be incorporated in your state and not be a federally recognized tax-exempt organization. Or, you can be registered as a 501(c)(3) organization and not be incorporated. Incorporating as a nonprofit is generally pretty inexpensive and simple to do, however—and it’s complicated (and expensive) to do it later if you change your mind. So we recommend incorporating first, then filing for tax-exempt status.

Here are steps we recommend to apply for both:

Apply for an EIN

An “employer identification number” is assigned by the IRS to identify your group as a legal business entity. You need this to open a bank account and to apply for federal tax-exempt status. Having an EIN does not automatically make you tax-exempt (or nonprofit, for that matter).

To check whether your PTO has its own EIN, ask the school for its EIN. Then check the EIN being used for your bank account.

Applying for an EIN is easy and free—don’t get taken in by fee-based services that say they will take care of it for you; it’s not worth it. If you apply for an EIN online, you’ll receive your number immediately. You can also download Form SS-4 to apply by mail or phone.


The “nonprofit” designation doesn’t mean your group can’t generate more income than expenses; it means you don’t have shareholders and don’t pay dividends. The money your group makes is thus put back into your organization to further its mission as a nonprofit organization.

Ask the school for its sales tax exemption number to check whether the PTO is using the school’s number or has its own. If the PTO does not have its own and wants to apply for one, go to the website for corporations within your state to check for information on how to apply. (Search your state name and “incorporation” to find the office that handles it.)

Benefits of incorporating:

  • It provides a level of protection for officers’ personal assets.

  • It doesn’t matter how long your group has been in operation already; by incorporating, you become a new organization in the eyes of the IRS, with no history.

  • If you incorporate as a nonprofit and then become tax-exempt at the federal level, you can follow up and become exempt from paying state-level income and sales taxes.

The whats, whys, and hows of 501(c)(3) and incorporation, plus all your FAQs

Apply for 501(c)(3) Tax-Exempt Status

To be designated as a federally recognized tax-exempt organization, your group needs to pay a fee and file the Application for Recognition of Exemption (IRS Form 1023 or Form 1023-EZ). The IRS often calls these groups “charitable organizations” or “exempt organizations.” Federal tax exemption means your group will not need to pay federal income tax on its net income from activities related to its mission. It’s not as easy a process as filing for state incorporation; but if you think of it as an investment in your group, then it’s well worth the time and cost. Remember: If you incorporate, you become a brand-new organization as far as the IRS is concerned and any previous status as a 501(c)(3) organization will not transfer. So incorporate first, then apply for tax exemption.

Benefits of becoming tax-exempt:

  • It shows your community that your group takes itself and its mission seriously.

  • Supporters who donate to your group can deduct those donations from their taxes.

  • Many grants are open only to 501(c)(3) groups.

Keep Your Determination Letter Safe

The determination letter comes from the IRS after it approves your Form 1023 application. This letter declares your PTO a federally recognized tax-exempt charity under section 501(c)(3) of the federal tax code. Don’t lose it!

Apply for State Tax Exemption

The rules vary from state to state; most require a separate (usually brief) application process for state-level exemption from income, sales, and use taxes. Search your state name and “sales tax exemption” to find out what you need to do.

Resources and Tips

501(c)(3) Basics for School Parent Groups (free webinar about federal tax-exempt status, incorporation, and other frequently asked questions)

501(c)(3) FAQs for Parent Groups

PTO Today Startup Toolkit, with line-by-line instructions for completing Form 1023-EZ

IRS Form 1023-EZ instructions and application

IRS application process questionnaire to determine whether paperwork is in order

IRS state links for exempt organizations

Originally posted in 2016 and updated regularly.


# Cora 2020-01-07 16:22
I just took over as Treasurer for our school's PTO, and discovered that the prior Treasurer has not filed the annual required tax information since 2010! Yes, 10 years. Our tax-exempt status was revoked in 2011 or 2012, I can't remember what the IRS lady told me. What would be the best course of action? I have no idea how to move forward. The IRS person over the phone said we'd have to go all the way back and file the required forms for the last 10 years, while paying hundreds of dollars in fines/penalties/reinstatement fees. We can't afford that. So, at what point could I start a NEW non-profit under a different name, so that we can get a fresh start? Is that even allowed? Please help :(
# Lani @ PTO Today 2020-01-13 13:56
Hi, Cora -- what a mess! To start a new nonprofit under a different name, you'd start by creating a new EIN, then incorporating within your state, then applying for 501(c)(3) status as a new group. Incorporation is an important step as it makes you a brand-new group with no financial history in the eyes of the IRS. You'll need to open a new bank account with the new EIN, then take steps to close the old bank account and formally dissolve the old group according to those bylaws. Hang in there -- Plenty of groups have been in your shoes and come out the other side, and we have resources that can help. Good luck!

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