Tax Rules for School Fundraising

Income Tax

Exemption from federal income tax is obtained by applying for status under 501(c)(3) of the tax code. Schools are eligible for this designation as are all educational activities. Organizations that support schools are usually also exempt by showing that they are controlled by and operated for the benefit of schools. Tax-exempt status permits generation of non-taxable income for specifically authorized activities. However, any profitable activity that deviates from the organization's primary purpose is potentially taxable as "unrelated business income."

In order to qualify as unrelated business income, an activity must be conducted regularly as a business and not have a substantial relationship to the organization's purpose. Therefore, occasional baked good sales as a school fundraising activity are not taxed as unrelated business income. However, permanently operating a public bakery on school facilities is likely taxable as unrelated business income.

Payment of quarterly estimated taxes is required if taxable income is expected to exceed $500.

Schools are normally not required to collect and remit state sales tax on products sold for fundraising purposes. For example, California exempts schools that sell products to exclusively further the school's purpose. New York has a broad sales tax exemption for any organization exempt from federal income tax. However, all operators of restaurants and retail stores must collect sales tax. Colorado's law is representative of the sales tax laws for most states. Specifically exempt from collecting sales tax are schools, non-profit organizations authorized by school authorities, and youth groups affiliated with a school.

Donations to a tax-exempt school are claimed as tax deductions on the income tax returns of donors. However, donors must obtain receipts from the fundraising organizers in order to capture the tax deductions. The rules fundraisers follow require providing receipts to donors with the name of the organization, the fair market value of goods received, and the tax-deductible amount of the donation. The federal income tax deduction for giving to a tax-exempt school's fundraising is limited to the amount contributed that exceeds the fair market value goods or services received.