California Tax-Exempt Status for HOAs
By Jeremy Newman
Newman & Associates, Inc. CPA
Why Obtain California Tax-Exempt Status for your Homeowners Association?
All homeowner associations are legally considered corporations. In the State of California, all non-tax-exempt corporations “which are incorporated or qualified in California are required to pay at least the $800 minimum franchise tax whether they are active, inactive, operate at a loss, or file a short-period return (less than 12 months).” Non tax-exempt corporations file Form 100 and report their net state taxable income, on which they pay the greater of either: 1) the minimum $800 tax, or 2) net state taxable income taxed at a rate of 8.84%.
California tax-exempt corporations, on the other hand, are not subject to the $800 minimum tax. Another benefit of the tax-exempt status is that these corporations instead file both Form 100 and Form 199.
- On the Form 100, these tax-exempt corporations only report their net nonexempt function income and pay tax on it at a tax rate of 8.84%. Nonexempt function income includes items such as interest income and rental income. These amounts are typically nominal after we factor in certain allowable tax deductions. Many tax-exempt associations either owe a minimal amount of tax or none at all.
- On the Form 199, these tax-exempt corporations report all exempt function income such as association dues, collection fees, violation fines and so forth. This income is not taxed and is reported solely for informational purposes. There will typically only be a $10 filing fee due with this form every year.
Furthermore, your association may also qualify to be refunded for previous California income tax liabilities paid that the association would otherwise not have been subject to had the association obtained tax-exempt status in prior years. The determining factor would be if the entity would have qualified during those tax years.
How Does a Homeowners Association Obtain Tax-Exempt Status in California?
Most homeowner associations are eligible for tax-exempt status in the state of California under Revenue & Taxation Code Section 23701t. In order to obtain this status, they must file CA Form 3500 Exemption Application. The form itself may be found here: https://www.ftb.ca.gov/forms/misc/3500.pdf
Only a residential association may apply and receive such status. Having said that, not all residential associations will qualify for tax-exempt status. Disqualifying factors include unpaid tax liabilities, outstanding delinquent tax returns, inactive status with the California Secretary of State, and the presence of excessive commercial activity in the association. As part of our preparation of the Form 3500 on your association’s behalf, we will determine whether your association qualifies.
For more information on how to obtain California Tax-Exempt Status and what the benefits of such status are, please visit the FTB’s website using the following link: https://www.ftb.ca.gov/businesses/Exempt-organizations/