Is your organization a legitimate tax-exempt organization?
Most youth sport's organizations (travel teams, leagues, and clubs), school band booster clubs, sport booster clubs, and PTOs/PTAs qualify for Internal Revenue Service (IRS) 501(c)(3) status, but fail to apply for it as required by federal law. In fact, many organizations operate as if they were tax exempt organizations, although no application for tax exemption was ever filed with the IRS. Still other organizations have incorporated as a non-profit corporation, but never filed for tax exempt status with the IRS. While most organizations that we encounter are capably operated by their volunteer staff, few appreciate the potential risk of financial liability to their volunteers because they or their predecessors failed to apply 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 the PTO has its own bank account, then it would need to establish its own tax exempt status separate from the school.
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 organization is too small to bother with filing for 501(c)(3) status.
The IRS expects any organization 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 revenue exceeds the $5,000 test, you should seriously consider filing. Otherwise, your organization is classified as a small business by the IRS and would be subject to federal tax on your group’s income. Penalties for not filing or late filing are $20 per day.
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 organization ever filed an application for tax-exempt status, and you have never heard of IRS form 990, then your group probably does not have 501(c)(3) status.
Uncertain of Your Current Tax Exempt Status?
A significant percentage of our clients had been operating for years and in some cases, decades, before learning that they did not have 501(c)(3) status. There are a myriad of reasons for these incorrect assumptions:
1. At some point in the organization’s existence, a board member may have attempted to apply for exemption and never completed the process. The misinformation perpetuated to future board members for years to come.
2. The organization applied for and received an Employer Identification Number. In the application they indicated that the organization was a Non-Profit and incorrectly thought this was all that needed to be done. In actuality, this is merely the first step in the process.
3. Many organizations falsely assume that because they are run by volunteers and
don’t get paid that they are automatically tax exempt. Unfortunately, this is incorrect. The only means to attain 501(c)(3) is to apply for it through the IRS.
Free Tax Exempt Status Check
If you’re unsure of your tax exempt status, please click here and we’ll verify your status for free.