PTO QUICKTIPSSM
An electronic publication of Pfau Englund Nonprofit Law, P.C.
Disclaimer: This publication is designed to provide accurate information in regard to the subject matter covered. However, it is not intended to provide legal or other professional advice. If legal advice is required, the services of a competent professional should be sought.
PTO Top Ten Legal Questions
- Do we need to incorporate our PTO?
No…but there are advantages to incorporating a parent-teacher organization
and it is a growing trend to do so. PTO's are typically organized in one of three ways:
- as a program developed and operated by a school;
- as an independent, unincorporated association of volunteers; or
- as an independent nonprofit corporation recognized by the IRS as exempt
from federal income tax under Section 501(c)(3) of the Internal Revenue Code.School program - a limited number of PTOs may be programs of a school. To be a school program the PTO should be created and/or controlled by the school in some way. For example, some church-operated private schools have formed PTOs. These PTOs typically have restrictions on how they may raise funds and use the funds raised. School-controlled PTOs, as a program of the school, may use the school's EIN (employer identification number), state sales tax exemption number, and federally recognized tax-exempt status of the school.
Unincorporated association of volunteer parents - the majority of PTOs continue to fall into this category. The PTO is independent from and not controlled by the school. The PTO may have a Constitution and/or Bylaws…but has not incorporated or applied to the IRS for recognition of tax-exempt status. The advantage to this structure is its looseness…there are no annual reports to file with the state….and seemingly few forms to file with the IRS. The disadvantage, however, is that should the PTO be sued the individual officers, directors and parents who make up the PTO may be personally liable for any judgments against the PTO. And, even if the PTO members are eventually found not liable, just defending yourself in a lawsuit can be quite costly. For this reason it is recommended that all PTOs carry appropriate insurance. In addition, sometimes unincorporated PTOs have more difficulty maintaining their independence from a school that may want to control how it operates, raises or spends it funds.
Incorporated, tax-exempt PTO - there is a growing trend for PTOs to incorporate and apply to the IRS for recognition of exemption from federal income tax. Nonprofit corporations tend to have greater credibility as independent entities. In addition, by incorporating the individual officers, directors and parent members of a PTO have greater protection from lawsuits. Typically only the assets of a nonprofit corporation are at risk in a legal action rather than the personal assets of the individual members.
- Do we need an attorney to incorporate and apply for tax-exempt status
or can the PTO complete and file the appropriate documents itself?
The forms that must be completed, and instructions to complete them, to incorporate and apply for federal tax-exempt status are almost all available online. In addition, this website includes do-it-yourself information to help PTO's incorporate and apply for tax-exempt status. That said, the process can be daunting and time-consuming for someone unfamiliar with IRS and legal forms. Therefore, while an attorney is not necessary, many groups find it helpful to seek professional assistance if they can afford to do so. Pfau Englund Nonprofit Law, P.C. provides a low-cost, flat fee program of $1000 to assist PTOs with the required legal documents.
- Can the PTO use the school's sales tax exemption number?
What about the school's EIN?
In most cases a PTO should not use the sales tax exemption number or EIN (federal employer identification number) assigned to a school unless the PTO is actually a part of the school and not an independent organization.
A sales tax exemption number is issued by the state and exempts the nonprofit organization to which it was assigned from the state sales tax applied to good and services purchased within the state. An organization must apply to the state for exemption from state sales tax. This exemption does not automatically come with recognition from the IRS as an organization exempt from federal income tax.
EINs are assigned by the Internal Revenue Service. EINs are typically required for all organizations to open a bank account, regardless of the way in which the organization is organized (i.e., nonprofit corporation, unincorporated group of parent volunteers, etc.). EINs are easily obtained by completing IRS Form SS-4 (available online at www.irs.gov) which may be then be telephoned, faxed or emailed in to the IRS.
- Do we need to file a tax return for the PTO?
There is no easy answer. IRS regulations provide that nonprofit, tax-exempt organizations must file an information return (IRS Form 990 or 990-EZ or 990-PF) if the organization has gross receipts of $25,000 or more per year. If your PTO is not incorporated and/or recognized by the IRS as tax-exempt, the IRS may treat the group as a business and expect that a tax return be filed if gross receipts are significantly less than $25,000 (perhaps as low as several thousand dollars). If an appropriate return is not filed the IRS can assess penalties for failure to file.
Therefore, if your PTO takes in total, gross income before expenses of $25,000 or more it is a good idea to file an appropriate tax or information return.
Keep in mind that if your PTO is assessed penalties for failure to file an appropriate tax or information return you may seek to have the penalty waived if you can argue that the PTO had "reasonable cause" for failure to file or that the PTO was not "willfully negligent."
- Can the PTO be sued?
Perhaps the most common question I'm asked is, "Can we be sued for that?" Unfortunately the answer is, anyone can sue anyone for anything…and someone probably will. And, whether or not the PTO or its officers, directors and members are liable, the cost of defending any legal action can be high. Therefore it is recommended that all PTOs develop at least a simple risk management plan and take steps to reduce the group's legal risks. See PTOs, Risks and Insurance on this Web site for more information on developing a risk management plans.
- Can the officers/directors/volunteers of the PTO be sued?
See #5 above - unfortunately anyone can be sued at anytime and the cost of defending yourself, regardless of ultimate liability, can be quite high. Officers and directors are less vulnerable if the PTO is a separately incorporated nonprofit organization. The corporate forms generally insulates the officers and directors from most liability. Even if a PTO is incorporated, however, I recommend that the PTO develop a risk management plan, including (but not limited to) obtaining officer and director liability insurance.
- Will the school's insurance cover activities of the PTO?
In some, rare cases, the school's insurance may cover the activities of the PTO…but don't count on it. When checking to determine whether the school's insurance coverage protects the activities of the PTO make sure to review the language of the insurance policy. In particular review who is an "insured" to determine whether an independently operated PTO is covered. Also carefully review the "exceptions" listed in the policy. Make sure that the exceptions are not the primary areas of concern and liability for the PTO.
- How should the PTO handle bounced checks?
Intentionally bouncing checks is illegal and may be reported to local law enforcement for criminal action. However, most PTOs handle the problem by keeping a list of persons who have bounced checks and requiring these persons to pay upfront in cash for all future activities of the PTO.
- Does our PTO need to develop and approve an annual budget?
One of the primary legal responsibilities of the governing body of any nonprofit group is to properly handle the group's finances. Developing an annual budget, and having it approved by the governing board or the membership as appropriate, is an important, basic leadership responsibility of the PTO. The budget does not need to be elaborate but should show at a minimum the primary sources of income for the PTO for the coming year and estimated amount of income from each, and the primary categories of expenses approved for the year. In addition, it is a good idea to develop and approve a basic financial operation policy for the PTO. The policy should specify at a minimum how many signatures are required on checks (for example one signature for budgeted amounts of $500 or less; two signatures for amounts greater than $500) and who may sign checks. It also is a good idea to implement standard financial controls in which the person(s) signing checks is different from the person who approves the expense and making yet a third person responsible for reviewing and reconciling the bank account each month.
- Are contributions to the PTO…such as to its annual auction…tax-deductible on the donor's personal tax return?
If the PTO is recognized as tax-exempt by the IRS contributions to the PTO may be tax-deductible for the donor. To be a contribution, however, the donor may not receive anything of significant value in return for his donation. Therefore, the value of items donate to a school auction may be tax-deductible for the donor. However, the amount paid for items purchased at a school auction is typically not tax-deductible as a donation because the purchaser is receiving something of value (whatever is purchased) in return for the amount paid. The exception may be if it can be documented that the amount paid exceeds the fair market value of what is received. For example, if someone pays $50 for a $25 gift certificate to a local restaurant. Commonly, however, whatever is bid for an auction item is considered by the IRS to be the fair market value of the item. Similarly, paying for raffle tickets and purchasing fundraising products is not considered a tax-deductible charitable contribution.
PTO QuickTipsSM is a periodic electronic publication of Pfau Englund Nonprofit Law, P.C. It is intended to provide nonprofit executives with useful, quick legal tips. If you have a topic you would like covered in this publication, or know someone who would like to be added to our e-mail list, please contact the firm.