Running a Christian school involves navigating various financial and legal responsibilities,including tax-related matters. Here are the top 10 tax tips for Christian schools to help ensure compliance and maximize benefits:
1. Ensure 501(c)(3) tax exempt status
• Christian schools not acting as integrated auxiliaries of a church need to apply for and be recognized as a 501(c)(3) nonprofit organization. This status exempts the school from paying federal income taxes and allows donors to make tax-deductible contributions.
• Comply with ongoing requirements to retain this status, such as filing the Form 990 (or 990-EZ) annually and avoiding political activity.
2. Understand State and Local Tax Exemptions
• In addition to federal tax exemptions, many states offer property, sales, and income tax exemptions for schools. Be sure to apply for these exemptions where applicable.
• State laws vary, so it’s important to consult with a tax advisor familiar with your state’s tax code.
3. Track Employee Benefits and Salaries Carefully
• Teachers and staff members in a Christian school may be eligible for certain tax benefits, such as salary deferrals or retirement contributions. Classify employees correctly (full-time vs. part-time) and comply with payroll tax laws.
• Schools may offer tax-advantage benefits like 403(b) retirement plans, flexible spending accounts (FSAs), and health savings accounts (HSAs), which can benefit all parties.
4. Ensure Proper Classification of Employees vs. Independent Contractors
• If someone is a full-time or part-time employee, they are subject to payroll taxes. Independent contractors (e.g., guest lecturers, after-school program leaders) should not be treated as employees.
• Misclassification leads to fines and penalties, so follow IRS guidelines carefully.
5. Charitable Contributions and Donations
• Christian schools often receive donations from families, alumni, and other supporters. Appropriate donation receipts must be supplied to donors (IRS Form 170), especially for gifts over $250.
• Keep detailed records of all gifts, including the amount and date of the donation, for accurate financial reporting.
6. Sales Tax Exemptions
• Many states offer sales tax exemptions for educational institutions. Determine whether this exemption applies for supplies, equipment, and other necessary items.
• Be cautious about sales to the public, as some states require sales tax to be collected on certain goods or services offered by schools, such as gift shop items or fundraising event sales.
7. Claim Available Tax Credits
• Some states offer tax credits for donations made to educational institutions, scholarship programs, or educational improvement programs. Investigate opportunities for such tax credits, which can help the school and supporters.
• If your school offers a scholarship fund, you may qualify for tax credits depending on the jurisdiction.
8. Utilize Depreciation Deductions
• For-profit Christian schools may own buildings and equipment eligible for depreciation. Depreciation allows the school to deduct a portion of the cost of these assets over time, reducing taxable income.
• Be sure to track depreciation for all qualifying assets, including buildings, computers, and vehicles, as this can provide significant tax savings.
9. Offer Tax-Exempt Fundraising Options
• Fundraising is often essential for Christian schools. When conducting fundraising activities, be mindful of the tax implications.
• Schools should explore ways to organize tax-exempt events like auctions, donations, and silent fundraising drives. Consult with a tax advisor to ensure that the fundraising activities meet IRS guidelines for nonprofit organizations.
10. File Timely Tax Forms and Reports
• Stay on top of tax filing deadlines to avoid penalties. For example, Christian schools that are not run by a church must file IRS Form 990 annually if they are a tax-exempt organization. This form reports the school’s income, expenses, and compliance with tax laws.
• If your school has employees, ensure that quarterly payroll tax returns (such as Form 941) are filed on time. Additionally, year-end W-2 and 1099 forms should be provided to employees and contractors as required.
Tax laws are complex, especially for nonprofits like Christian schools. These steps will assist you in navigating taxation more effectively and ensure legal compliance. If you have questions, please reach out to us at the CLA office.