An Administrator's Guide to California Private School Law

Chapter 2 - Governance

C. T AX -E XEMPT S TATUS Tax-exempt organizations are not required to pay taxes on money that the organization receives related to its exempt activities. A non-profit corporation is not automatically tax-exempt. Rather, it must apply for tax-exempt status from both federal and state taxes. 1. A PPLYING F OR 501( C )(3) T AX -E XEMPT S TATUS Private schools must apply to the IRS for 501(c)(3) tax-exempt status. The purpose of obtaining tax-exempt status is to become exempt from federal income tax and to become eligible to receive tax-deductible charitable contributions. Furthermore, IRS recognition of an organization's 501(c)(3) exemption assures foundations and grant-making institutions that they are issuing grants to permitted beneficiaries. In order to obtain 501(c)(3) status, a school must first apply for an Employer Identification Number (EIN) by filing IRS Form SS-4. 8 It must then complete an Application for Recognition of Exemption Under Section 501(c)(3) by submitting IRS Form 1023. 9 If someone other than the school's Chief Executive Officer or Director (such as an accountant) will be representing the school on matters concerning the application, the School should also file IRS Form 2848, the Power of Attorney and Declaration of Representative. 10 Generally, a school must file IRS Form 1023 by the end of the 15th month after creation (incorporation), but a 12-month extension is available. However, a school does not need to file the Form at all until its annual gross receipts are more than $5,000. Once it exceeds this threshold, the school must file IRS Form 1023 within 90 days of the end of the year in which it exceeded the threshold. A school that files its application before the deadline will be recognized as tax-exempt from the date of creation. A school that files its application after the deadline may be recognized as tax-exempt from the date of the application, but may also request that the exemption be retroactive to the date of creation. Once the IRS receives a completed IRS Form 1023 and determines that the information provided establishes that the school meets the requirements for the exemption, the IRS will issue a determination letter recognizing the school's tax-exempt status. This is an important document that should be kept in the school's permanent records. While the school awaits approval of its IRS Form 1023, the school may operate as a tax-exempt organization. While donors have no assurance that contributions are tax-deductible for federal income tax purposes until the application is approved, any contributions made while the application is pending will qualify once the application is approved. Once the school has obtained 501(c)(3) exemption status, it must file a Form 990 annually to maintain that status. 2. T AX E XEMPTION U NDER C ALIFORNIA L AW In order to be recognized as tax-exempt under California law, schools must apply for a determination letter from the California Franchise Tax Board that exempts the school from state

An Administrator’s Guide to California Private School Law ©2019 Liebert Cassidy Whitmore 27