CAI-NJ Sep.2016

Exempt Social Welfare Organizations Could Your Association Qualify?

By Carol Koransky, CPA Wilkin & Guttenplan, P.C.

A s the old saying goes, there is one thing that is cer- tain in life and that is taxes. This doesn’t just apply to individuals, it also applies to most Associations. The great majority of associations file their annual federal tax returns as either a regular corporation (Form 1120) or electing to file as a homeowner/condominium association (Form 1120H) under IRC section 528. In either case, the association is subject to federal income tax on certain qualifying income. The tax rate applied when filing as a regular corporation is a graduated tax starting at 15% up to the first $50,000. The tax rate followed when filing as a

homeowner/condominium association is a flat tax of 30% on certain qualifying income. Qualifying income is defined differently under these alternatives as well. There is one exception that some Associations have been able to meet. That exception is to qualify as a Sec. 501 c (4) organization – an Exempt Social Welfare Organization. The exception is very limited and a number of Associations that have applied for this status have been denied it. Just recently, the IRS has been busy once again with issuing a private ruling on a homeowner Association requesting such a status. In the recent ruling, the IRS ruled that the Association that requested this status was denied the status as it didn’t qualify as a social welfare organization. What does an Exempt Social Welfare Organization mean? An organization is considered to be an exempt social welfare organization if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. The organization must be operated primarily for the purpose of bringing about civic betterments and social improvements. The IRS has described three elements that must be satisfied for a homeowner Association to qualify for this exemption:

Carol Koransky, CPA, MBA is a principal at Wilkin & Guttenplan, P.C. Wilkin & Guttenplan is a medium sized public accounting firm located in East Brunswick, NJ. Founded in 1983, Wilkin & Guttenplan serves closely-held/middle market businesses and their owners, high net worth individuals, the sports and entertainment industry, medical/healthcare practices, and a multitude of real estate entities. The firm also

Courtesy CAI-NJ.

specializes in a number of niche markets, specifically the Common Interest Realty Association (CIRA) market. Wilkin & Guttenplan is recognized as one of NJ’s top mid-sized businesses according to NJBiz Best Places to Work in NJ.

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