Homeowners’ Associations, as nonprofit corporations, generally meet the requirements to qualify as a tax-exempt Social Welfare Organization under Internal Revenue Code section 501(c)(4). Other types of activities may also qualify under Section 501(c)(4), such as bringing about civic betterment or social improvements.
The key elements for qualification as a 501(c)(4) tax exempt organization are:
1. The organization must be organized exclusively to promote social welfare;
2. The “social welfare” must operate primarily to futher the common good and general welfare of the ALL the people of the defined community;
3. The organization can seek legislation germane to the organizations programs as a means to attain the specific “social welfare” goal (legislation or political goals or lobbying cannot be its primary activity;cannot support a person for political office; and analysis of whether the organization should be a “political organization” rather than a “social welfare” is important);
4. Expenditures for political activities may be taxable.
5. If the primary purpose of the organization is for the benefit, pleasure or recreation of its members, then the organization is a “social club” and does not qualify as a “social welfare” organization under 501(c)(4) of the Internal Revenue Code.
6. If the organization is carry on a business with the general public then it may not qualify as a “social welfare organization under 501(c)(4) of the Internal Revenue Service or may have to pay taxes on the unrelated income of the organization.
When most people think of a “nonprofit”, the first thing that comes to mind are the charitable organizations or foundations formed under 501(c)(3) of the Internal Revenue Code. There are numerous types of tax exempt nonprofits. It is important when involved with a tax exempt nonprofit to understand the exact exemption under which the organization was granted tax exempt status and the specific Internal Revenue Codes and regulations related to that type of organization.
L. Sue Loftin is the Founder and Shareholder of The Loftin Firm. For questions relating to this blog or any other California real estate, corporate governance, land use, or estate planning matter, contact Ms. Loftin at 760-814-9649.