If an Association Is Nonprofit, Why Do They Pay Taxes?

If an Association Is Nonprofit, Why Do They Pay Taxes?

This is the number one tax question asked by homeowners, board members, managers and even accountants (outside of this industry). Community associations (CAs) are nonprofit mutual benefit type of corporations. To qualify for Federal tax exemption and pay no income taxes an organization must:

  1. Serve some type of common good.
  2. Not be a “for-profit” entity.
  3. Not have net earnings that benefit the members of the organization.
  4. Not exert political influence

CAs are not organized for the common good of society, such as for religious, health and welfare, education or other tax-free type of purposes. A community association is simply a group of taxpayers who have formed an organization to share expenses. Thus, the CA is allowed to exclude from income most monies (and we will discuss the exceptions later) from the member/taxpayers. However, such items as interest income, which would be taxed at the taxpayer level, are also taxed at the CA level.

To be entirely honest, there is a very small percentage of CAs which are nonprofits who do not owe taxes on any income. These CAs are considered as “communities” for the public good.  They cannot be condominiums, and even very large planned unit developments have difficulty getting exemption. IF exemption is granted by the IRS after applying for it, then all income is tax-free and an entirely different tax form is used each year. The tax form is form 990.

There is even a smaller percentage of CAs which file for exemption, receive exemption on membership income, but pay on interest income. These are “social clubs”. They also file form 990.