In California, community associations are primarily nonprofit mutual benefit corporations. Before changes in the tax code, homeowner associations were set up under the IRS Code as a 501(c)(7) or sometimes as a 501(c)(4) organization. Now, they primarily fall under IRC § 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, and 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 standards and better business practices. 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, such as 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.
IRS § 528. Homeowner Associations. IRS § 528 provides a specialized tax framework for HOAs, allowing them to exclude their primary source of revenue (member dues and assessments) from taxable income and be taxed at a specific rate on other income sources. To qualify, an HOA must have at least 60% of its gross income from membership dues, fees, and assessments, and at least 90% of its expenditures for the maintenance and care of association property.
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