Why The IRS Requires Nonprofits to Operate With One General Fund

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.

Please note: I reserve the right to delete comments that are offensive or off-topic.

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2 thoughts on “Why The IRS Requires Nonprofits to Operate With One General Fund

  1. I believe our booster club has several discrepancies that I would like feedback on.
    The Water polo coach asked the booster club to pay for hotel room on two different occasions, purchased a parka ($130) without first asking the booster club, and the coach is demanding that the items JUST be paid. She has not turned in receipts for the hotel which was significantly less than what we gave before the tournament. She purchased approximately 175 water caps/ $639.00 for approximately 50 players. The coach sold them to the girls, again without board approval, but the booster club has not received any of the funds from selling the caps.

    I would appreciate some feedback since we are having a board meeting and the consensus seems to be back the coach.

    • Hello Claudia,

      It sounds like your coach is putting herself at risk with booster funds. Coaches should maintain an “arm’s length” distance between themselves and booster funds. This not only protects the booster club, it also protects the coach from any suspicion of wrongdoing. Here’s my opinion on the discrepancies you have shared:

      1. Reimbursement for hotel (two occasions) and parka:

      * Anyone who purchases items on behalf of the booster club needs approval from the club’s officers BEFORE the making a purchase. This includes coaches, committee chairs, and officers. After the officers approve the purchase, the treasurer will write a check to the vendor, ultimately for the purchase amount (if accurately known beforehand), and give it to the person who has been authorized to make the purchase. CPAs, school boards, and the IRS frown upon reimbursements of personal funds spent for booster items.

      * Receipts are required for ALL booster club purchases. This is a sound accounting practice, and provides proof that funds were spent for their intended purpose.

      * Although the coach is demanding the items to be paid, your booster club would be justified not to reimburse the coach until she provides the receipts.

      2. Purchase of water caps:

      * The ideal condition would be for the booster club to negotiate pricing of required equipment with a vendor, and students purchase directly from the vendor. Many booster clubs bring vendors on-site to sell equipment directly to students.

      * Again, the coach should have sought board approval before making a purchase.

      * You say the coach hasn’t turned-in funds from the sale of the caps. This may sound harsh, but if the booster club made the initial purchase and the coach hasn’t reimbursed the funds, that’s actually theft. I hope this is not the case.

      * If the coach sold the caps for more than they cost, the booster club could owe sales tax on the proceeds. This would depend on your state’s rules for nonprofit fundraisers, and how many sales you’ve already had for the year. For example, in my home state of Tennessee, nonprofits are allowed two fundraisers per year – where products are sold – without paying sales tax. And, the fundraisers’ duration (number of days) is limited.

      I appreciate your sincere concern and your dedication to your child’s activity. I recommend your booster club to notify the school principal of these discrepancies, and to seek the guidance of a CPA to ensure you comply with your state’s and school board’s rules and regulations for nonprofits.