We often get asked whether community associations can or do qualify as 501(c) organizations under the Internal Revenue Code. Sometimes the question arises because the association derives too much income from sources other than assessments to file IRS Form 1120-H, and it is looking at way to decrease its income tax liability. Below are some considerations in relation to the primary 501(c) designations an association might seek to obtain.
501(c)(3) – Charitable Organizations
At times, an association may wish to have 501(c)(3) status in order to accept donations, such as for voluntary community beautification projects, from owners and offer those owners a tax break for the donation. In order to do so, the association needs to be classified as a 501(c)(3) charitable organization. However, the IRS has been hesitant to grant this status to community associations. The primary reason for this is because associations function primarily for private (i.e., homeowner) versus public benefit.
501(c)(4) – Social Welfare Organizations
A small percentage of associations may be able to qualify as a 501(c)(4) entity, which are designated as “social welfare” organizations. In order to qualify for an exemption under 501(c)(4), an association must maintain common area components that are open to the general public. It must also occupy the same geographic area as a governmental entity. Finally, the association itself must also qualify as a community. Obviously, most associations that would qualify under this section are those that are large, master planned communities. This section also prohibits significant private benefit, which will rule out many associations from getting this status.
501(c)(7) – Recreational Organizations
Again, very few associations will qualify as a recreational organization, because most associations contain areas that serve private residential purposes, with recreation being ancillary.
Before determining if your association can or should seek to qualify under any of the above exemptions, you should seek specific legal and tax counsel.