Being tax exempt could save your HOA money in annual tax return forms, but achieving exemption is trickier than it looks. Homeowners associations are usually already considered nonprofit corporations, but just being a nonprofit doesn’t automatically make an HOA tax exempt, or even eligible for tax exemption. Here, we’re going to answer some basic questions to help you understand how your HOA can apply for and achieve tax exemption.
What is a Nonprofit Corporation (or Organization)?
A nonprofit corporation, or organization, is simply an organization that has directors and members, rather than owners or shareholders, and whose main purpose is not profit-making. Most HOAs fit these qualifications because their main purpose is to manage and maintain the community, their board members and other officers are volunteers who do not profit from their work in the community, and they do not have owners or stockholders. Although HOAs do earn money from assessments, they do not profit from these earnings; instead, they use the money to benefit the community. Even though being a nonprofit in and of itself does not qualify an HOA for tax exemption, this is an essential first step.
What Types of Exemptions Can HOAs Apply for?
There are two types of tax exemption available for HOAs:
Federal income tax exemption and state franchise tax exemption. Federal income tax exemption is very difficult for HOAs to obtain and would require an HOA to secure 501(c)(4) status. An HOA might also be able to achieve 501(c)(7) status, but this is even rarer.
To become a 501(c)(4) organization, you must prove your association’s main goal is to promote the social welfare of the community. However, doing so may require amending your association’s governing documents. If you desire to pursue federal income tax exemption, seek professional advice to create an action plan.
The other type of tax exemption an HOA can apply for, state franchise tax exemption, is more easily obtained by homeowners associations. To become exempt from this type of tax in Texas, an HOA must prove three central items. First, your HOA must be a nonprofit with the main purpose of managing residential property. Secondly, your HOA cannot include commercial property. And, lastly, the homeowner members must have 51% or more of the vote in the association.
Visit the following website for more information and the state franchise tax exemption form for Texas: https://comptroller.texas.gov/taxes/exempt/hoa.php
Arizona HOAs may also apply for state franchise tax exemption. According to the State of Arizona Department of Revenue, if an HOA is already exempt from federal income tax as a 501(c)(4) or 501(c)(7), the association is also exempt from Arizona income (franchise) tax.
Basic information about Arizona tax exemptions can be found on this website: https://www.azdor.gov/Forms/ExemptOrganization/GeneralInformation.aspx. Please see a professional for more details.
Applying for tax exemption can be tricky and time consuming, but the overall benefits for your HOA might be worth it! Look into the above tax exemptions to determine if either, or both, would be a good fit for your HOA. For additional assistance in HOA management, contact Spectrum Association Management today. We have locations through Arizona and Texas and we have designed our services to be refreshingly different.