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- Do we need to incorporate and file for federal [501(c)(3)] tax-exempt status?
What are the advantages of incorporating and becoming tax-exempt?
There is no legal requirement that a PTO incorporates and/or file for federal or state tax-exemption. PTOs may operate as unincorporated associations of parents/others who wish to support a school.
Advantages to Incorporating and Seeking Tax-Exempt Status:
- Decreases personal liability of officers/members of PTO. If a PTO is not incorporated the individual members/officers of the group may be held liable for the activities of the organization. Therefore, if a legal claim is brought against an unincorporated PTO and there is a judgement against the PTO, the personal assets (houses, cars, etc.) of the officers/members may be used to pay the judgement. This liability may be reduced by purchasing insurance for the PTO and its officers/members. In addition, it is possible that the school's insurance policy may provide liability coverage. HOWEVER, you should never assume that the school has insurance covering the activities of the PTO. Always check what policies the school has, whether they cover the PTO and its officers/members, and whether any exceptions in the insurance policy exclude coverage for the activities that you believe are most vulnerable to legal claims.
- Increases the control of the PTO over its activities. As a separately incorporated, tax-exempt entity the PTO, its officers and members will generally have greater control over the group's activities and operations. As an unincorporated school entity, the PTO is more subject to the control of the school, the school principal and other school officials.
- Contributions to group are tax-deductible and PTO is eligible for private foundation grants. Organizations that are tax-exempt under section 501(c)(3) of the Internal Revenue Code may receive contributions that are tax-deductible to the donor. This is a great advantage of tax-exempt groups. However, legally tax-exemption arises if a group qualifies for exemption based on the federal internal revenue laws and regulations. Therefore, it may be legal for a donor to deduct a contribution to a PTO regardless if the group has applied for and received recognition of tax-exempt status from the IRS. Nevertheless, the IRS is more likely to deny a deduction if the contribution is made to a PTO that has not been recognized as tax-exempt. More important for some PTOs is the ability to apply for
private foundation grants if the group is recognized as tax-exempt. Private foundations generally may only make grants to groups recognized as tax-exempt by the IRS under section 501(c)(3) of the Internal Revenue Code.
- Credibility. Many groups find that the group and its activities are taken more seriously by all involved if the group is incorporated and recognized as tax-exempt.
How does a PTO incorporate and apply for tax-exempt status?
It is generally a three-step process:
- Draft and file Articles of Incorporation with the state government in the state in which the PTO is located. Most states have a sample form that you may use to draft the Articles online, typically part of the Secretary of State website, possibly under a special corporations section. NOTE: If you plan to apply for 501(c)(3) tax-exempt status you will need to include special IRS language in the articles of incorporation.
- Draft bylaws. Sample bylaws are available at or at
- Complete and file IRS Form 1023. This form is available online at the IRS website, under Forms and Publications. The IRS form can appear overwhelming. Sample forms and instructions are available at for do-it-yourselfers. You may also seek the assistance of a legal or accounting professional. I am providing a substantial discount from my standard rates to assist PTO groups incorporate and seek tax-exempt status. Please call or for information on my special PTO program.
Are there restrictions on how a PTO spends its funds?
Generally a PTO's governing documents (articles of incorporation, bylaws, constitution, etc.) govern how a PTO operates and how decisions regarding expenditure of its funds are made. If the group is a 501(c)(3) tax-exempt organization the group must spend its funds in furtherance of the tax-exempt purpose(s) stated in its exemption application. Generally this purpose will be broadly stated as supporting the school. If the group is not a separate entity but rather an activity of the school, the school may have some control over how funds are expended.
When is a contribution deductible for the donor?
Generally whenever a contribution is made to a charitable, tax-exempt organization it is deductible if nothing of value is received in return for the contribution. A contribution may also be deductible if something of limited value (a key chain, coffee mug, quarterly newsletter, etc.) is received in return. For example membership dues to a tax-exempt PTO may be deductible, even if every member receives a key chain and the quarterly newsletter in return for the membership fee. However, no part of purchases of candy, gift-wrap or other products is deductible because something of value is received in return. When a contribution exceeds the value of the item received, a deduction for the portion of the contribution exceeding the value of what is received is deductible. For example, if your PTO sponsors a dinner dance with tickets costing $75 each but the fair market value of the dinner and dance is really only $50, you should state on the ticket that $25 of the ticket price is deductible as a charitable
contribution. With respect to school auctions, donors of items may take a deduction for the fair market value of the item donated. However, purchasers of items at the auction generally may not deduct the price paid because the price paid is typically considered the fair market value of the item purchased. There may be an exception to this rule if the value of the item purchased is obvious (i.e. a $25 gift certificate to a local restaurant) and the price paid exceeds the fair market value. However, the value of items such as a piece of furniture hand-painted by the second grade class is generally considered to be the price paid….no matter how crazy the bidding may get!
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