We have spent a lot of time discussing federal income tax rules for homeowners associations (“HOAs”). But state tax considerations are equally important and often more complex. In this post, we take a look at some of the HOA tax filing requirements for California HOAs.
As a CPA firm that deals with clients in all 50 states, we know that California is one of the more difficult ones. We will try to navigate through and discuss the complexities.
California corporations are subject to the franchise tax rules. However, they may be exempt from taxation under one of the subsections of revenue and taxation code section 23701.
Specifically, under Revenue and Taxation code section 23701t, they may qualify as tax exempt.
Exemption for California HOA Tax Returns
So how do you obtain an exemption? Corporate HOAs can apply for exemption under Revenue and Taxation Code section 23701t by filing an exemption application using Form FTB 3500. This can be a complex process as the form is cumbersome to complete and will typically require careful coordination between the CPA and HOA board.
In order to meet tax exempt status in California, the HOA must meet two main test: (1) the organizational test; and (2) the operational test. The test requirements are outside the scope of this post. However, the requirements are very similar to Internal Revenue Code section 528 for federal tax purposes. Accordingly, if an HOA can qualify to file Form 1120-H, it generally can also qualify for an exemption under California law.
Organizations that fail to receive tax-exempt status from California are subject to the minimum franchise or income tax. The application should be submitted at least 90 days before the tax-exempt status is required to allow for adequate processing time.
It also means that the Association must meet the qualifications set forth in that section of California code. The benefit is significant because exempt associations are subject to the income tax rules rather than the franchise tax rules.
Franchise tax is basically a tax on gross receipts, less any allowable deductions. U.S. Treasury interest is typically considered exempt interest under income tax rules, but it is taxable under the franchise tax rules.
However, there are some differences between federal and California law. One difference is that cooperatives may not file Form 1120-H, but will still qualify under Revenue and Taxation Code section 23701t for California purposes.
Another difference relates to unincorporated associations, which are automatically subject to the income tax rules rather than the franchise tax rules for purposes of California taxation.
California Condo Association Filing Requirements
California has certain filing requirements and provides a useful guide. So let’s look closer at the filing requirements:
- All corporate HOAs must file form 100;
- HOAs are also required to file Form 199, which reports all exempt activities. This can be accomplished through an online “postcard” filing. However, HOAs can file the paper form which will serve as proof of filing.
The California Franchise Tax Board (FTB) has long had a policy of suspending corporate status for associations that either failed to file tax returns, or failure to file the biennial statement of officers with the Secretary of State’s office. Failure to file any of the tax forms or officer notice can result in suspension of the Corporation. While that has certain legal implications, such as the inability to legally contract for services, and the loss of rights to the name of the corporation, it also has a financial impact.
The Franchise Tax Board in recent months has been very aggressive and also revoking exempt status for corporations that have been suspended for any reason. The impact of this is that the Association must not only supply any missing tax returns or statement of officers, but they must also file a “Certificate of Revivor” and a new application for exempt status on Form FTB 3500.
California also imposes filing fees for filing form 199. Please see the table below:
We serve the following CA communities:
Acton, Adelanto, Agoura Hills, Alameda, Alamo, Albany, Alhambra, Aliso Viejo, Alpine, Alta Loma, Altadena, Alturas, Amador City, Anaheim, Anaheim Hills, Anderson, Angels Camp, Angelus Oaks, Antelope, Antioch, Anza, Apple Valley, Applegate, Aptos, Arcadia, Arcata, Arleta, Armona, Arnold, Aroura Hills, Arroyo Grande, Atascadero, Atwater, Atwood, Auberry, Auburn, Avalon, Avery, Avila Beach, Azusa, Bakersfield, Baldwin Park, Bangor, Banning, Barstow, Bay Point, Bayside, Bel Air, Bell, Bellflower, Belmont, Belmont Shores, Belvedere, Ben Lomond, Benicia, Berkeley, Berry Creek, Beverly Hills, Big Bear City, Big Bear Lake, Big Sur, Bishop, Blue Jay, Blue Lake, Blythe, Bolinas, Bonita, Borrego Springs, Bothell, Boulder Creek, Brea, Breenbrae, Brentwood, Brisbane, Buellton, Buena Park, Burbank, Burlingame, Burlington, Calabasas, California City, Calimesa, Calistoga, Camarillo, Cambria, Cameron Park, Campbell, Campo, Canoga Park, Canyon Country, Canyon Lake, Capistrano Beach, Capitola, Cardiff, 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