There are different types of nonprofits, including homeowner and condominium associations. However, not all nonprofits are the same when it comes to tax deductions and tax liability.
You may have heard the term “501(c)(3) organization” associated with your favorite nonprofit charity. The reference, 501(c)(3), comes from the section of the federal Internal Revenue Code describing such entities. Contributions to 501(c)(3)s are usually deductible on a donor’s income tax return. There are a host of other kinds of 501(c) organizations such as 501(c)(4) civic leagues, 501(c)(5) labor unions, and 501(c)(6) trade organizations like a retail association. Contributions to these kinds of organizations are not tax deductible as charitable contributions. However, taxpayers may be able to deduct dues to these other types of nonprofits.
There are also some nonprofit organizations that are not in the “501 series” at all. Condominium associations, homeowner association and planned community associations are organized under state law as nonprofit corporations, but they are not federally tax-exempt under 501(c) series. These organizations must file an annual General Excise Tax return with the State.
A typical homeowner or condo association gets income from maintenance fees. Even though these fees are exempt from General Excise Tax, failure to file could mean the association loses the exemption, and becomes financially liable.
The General Excise Tax Protection Act was enacted in 2010, specifying that if a taxpayer doesn’t file an annual return within a year after it’s due, the taxpayer will lose all credits, deductions or lower rates. The law also says if tax is due from an entity but isn’t paid, the Department of Taxation can go after the personal assets of responsible individuals to collect it.
Yikes! While there is some leeway for charitable nonprofits, homeowners’ or community associations do not have these protections.
Don’t think that exempt from tax means no need to file a return. If no return is filed, after a year the exemption is removed with no notice, and the association’s income is subject to GET tax. Also, there is no limitation, so if the problem persists for years, it could grow into a devastating financial situation. An assessment could be made against the association at 4% or more of maintenance fee income for as many years as are in default. By law, this penalty could be enforced against the management company or association board members. There is no exemption for volunteers.
If you are in a self-managed condominium or homeowners association, ask if your group if filing GET returns each year. If not, immediate action needs to be taken to stop accruing financial liability.