Last week, we saw that the IRS prohibits booster clubs and other nonprofit organizations from operating with individual student accounts. Instead, booster clubs must operate from one general account, and distribute funds to benefit all students equally. Now, let’s take a moment to consider why.
The IRS Generates Revenue for the Federal Government
The IRS’s primary function is to generate revenue for the federal government. Since section 501(c)(3) exempts booster organizations from paying taxes, the IRS leaves a considerable amount of revenue “on the table.” Without the exemption, you could owe 15 ~ 25% of your organization’s income in taxes. When you think in these terms, the IRS’s stringent guidelines begin to seem more reasonable.
But it doesn’t stop there. Let’s illustrate additional tax implications associated with student accounts. Consider that a booster organization sets a fair share of $300 per student. Tyler’s family writes a $300 check to satisfy his fair share at the beginning of the year. Megan, on the other hand, works fundraising events through a partnership with the local university. Throughout the course of the year, Megan earns enough through fundraising to satisfy her fair share.
Tyler’s family paid out-of-pocket with funds that had already been taxed. Assuming a tax rate of 20%, Tyler’s family had already paid $60 in federal income tax on the funds used to satisfy his fair share. Since Megan’s fair share was earned through fundraising, the university had most likely made a donation to the booster organization and claimed it as a tax deduction. Therefore, taxes were never collected on the funds used to satisfy Megan’s fair share, which we have estimated to be $60.
How Would Your Booster Club Fare in an Audit?
As we have seen, the IRS requires booster organizations to distribute funds equally to all students, regardless of their individual participation in fundraising activities. This is just one of many IRS requirements for nonprofit organizations.
Do you know all of the IRS requirements for your booster club? Are you confident that your booster club fully complies with the IRS? How would your booster club fare if you were audited?
To learn all of the IRS’s requirements for booster clubs, check out my book, The Booster Leader, 35 Leadership Essentials for a Thriving Booster Organization. It will equip you to lead with confidence and give you the assurance of complying with all IRS requirements. The Booster Leader is available on Amazon in Kindle and paperback formats.
Question: What steps does your booster club take to comply with IRS requirements? You can leave a comment by clicking here.