In California, community associations are primarily nonprofit mutual benefit corporations. Prior to changes in the tax code, homeowner associations were set up as under the IRS Code as a 501(c)(7) or sometimes as a 501(c)(4) organization. Now, they primarily fall under IRS 528, which was created specifically for HOAs. Even though they are nonprofit corporations, homeowner associations must file tax returns and pay taxes. Following is a summary of some of the more common 501(c) tax categories:
501(c)(3). Religious, Educational, Charitable, Scientific, Arts Organizations. These are public interest groups. They are exempt from taxes but limited in the kinds of political operations they can perform. Donations to these organizations are tax deductible.
501(c)(4). Civic Leagues and Social Welfare Organizations. Donations to these associations are not tax deductible. Homeowner associations that qualify as exempt organizations are exempt from income taxes, except for any unrelated business activities. See www.501c4taxexempt.com.
501(c)(6). Trade and Professional Associations (Business Leagues). These include chambers of commerce, real estate boards and the like. These organizations are specifically geared toward promoting the business interests of companies or individuals. They typically promote higher business practices and better business methods. Donations to these organizations are not tax deductible.
501(c)(7). Social and Recreational Clubs. These include college fraternities or sororities, country clubs, hobby clubs, garden clubs, recreational sports leagues, etc. Homeowner associations that qualify under this section pay taxes on net income from nonmember activities and investment earnings.
501(c)(8). Fraternal Associations. These organizations operate under a lodge system that requires a parent organization and a subordinate called a lodge, branch, or the like. It must provide for the payment of life, sick, accident, or other benefits to the members of the association or their dependents.
RESOURCE: For more information about making an association exempt, see www.501c4taxexempt.com. Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.