This message is in response to questions in another thread that was getting pretty long. Since it is very generic information, I’m posting it as a new thread. Let me again emphasize that I’m not an attorney or a CPA. However, I am willing to share what I’ve learned this last year from research and the assistance of many others on this forum. If I've misrepresented anything, or you have more to add, please chime in. Below is a summary.
Once an organization (e.g., PTO or other club) begins to conduct business, and especially financial activities, it becomes an entity with potential legal and tax obligations at both the state and federal level. Here are the key terms and types of status that we have been discussing.
EIN Number – Regardless of what else you do, your PTO really needs an Employer Identification Number (EIN). This is the business equivalent of a social security number and is not difficult to obtain. You simply a complete a one-page IRS form called an SS-4. There is no fee, there’s nothing complicated about it. This is just a basic first step. For instance, you will find it much easier to open a bank account if your EIN is already assigned.
Incorporation - This is a type of business structure (controlled by STATE laws). Based on whatever requirements the state sets an entity may become incorporated, in this case as a non-profit corporation. Doing so makes the organization a legal entity in its own standing and thus reduces individual liability of its leaders. If it’s not incorporated, then the organization is basically a collection of individuals who could face personal responsibility/liability in certain circumstances. (That’s about as much as I know about incorporation, because we didn’t incorporate. You’ll have to check with your state as to what the process is/what forms you file.)
Tax-Exempt – This is a STATE term. Generally a qualified organization files an application with the state to become tax-exempt. Typically, this means that you are exempt from some or all sales tax. (Might also apply to other state taxes like income tax or real estate taxes.) Specifically, when you BUY items for qualified purposes as the PTO, you don’t PAY sales on the purchase. It also means that you may not need to collect/remit sales taxes on things YOU sell. You need to check your state laws – it may not be all or nothing. In Texas, we can have 2 days (i.e., fundraisers) per year that are tax-free. On other fundraisers, we remit sales tax to the state comptroller.
Non-Profit Status [especially 501(c)(3)]. This is a FEDERAL term. You complete IRS Form 1023, pay a $150 or $500 fee (depending on gross proceeds), provide designated documentation (Articles of Incorporation or Constitution/Bylaws, budget, narrative about purpose), and agree to terms (like limitations on political activity). Once gaining 501(c)(3) status, you are exempt from most federal corporate income tax, have more credibility as a non-profit, are eligible for certain benefits like non-profit postal rates, and, most importantly, contributions to your group can be tax deductible for donors. Additionally, this status may make it much easier (or even be required) for receiving grants. A 501(c)(3) with more than $25,000 gross proceeds files an informational tax return each year – either the 990 or 990EZ. The Form 1023 isn’t simple, but many of us have waded through it without professional assistance.
Note, if you are an independent entity and not formally listed as a non-profit (501c3 or other 501 category) and you have gross proceeds of $5000 or more each year, you are a BUSINESS as far as the IRS is concerned and should be filing an annual corporate tax return.
These seem to be the rules and facts. However, practicalities of life also must be considered. Each PTO needs to weigh the rules, risks, costs, etc. and decide how to proceed. If you have the need and/or the opportunity to consult a professional (CPA/lawyer) then absolutely do so. These things can be complex, and I do not claim to have all the answers.
Key sources of assistance and reference:
Your state web site (
www.state.xx.us
) - replace the “xx†with your state abbreviation
IRS forms and publications:
www.irs.gov
IRS Exempt Organization customer service toll-free line 1-877-829-5500.
8:00am - 9:30pm EST Monday-Friday. (Incredibly helpful people!!)
www.ptotoday.com/nonprofit.html
- a list of resources many of us have contributed to on PTO Today
(And I'm sure this list will soon be linked from the main page. Yes, Tim – that’s a hint.)
Good Luck to all of you!
[This message has been edited by JHB (edited 02-17-2001).]
