Condominium and Community Associations: File or Else!

by Tom Yamachika, President, Tax Foundation Hawaii

Every day we hear about “nonprofit organizations.” But some of us might not know that there are different flavors of nonprofits with vastly different consequences. Our focus will be on homeowners’ and community associations.

But first, a little background is in order. Most of us have heard about “section 501(c)(3) organizations” such as the Tax Foundation of Hawaii or the Aloha United Way. The reference, 501(c)(3), comes from the section of the federal Internal Revenue Code that describes such entities. Contributions to 501(c)(3)’s are generally deductible for income tax purposes. There are also many other kinds of 501(c) organizations such as 501(c)(4) civic leagues like the Jaycees, 501(c)(5) labor unions, and 501(c)(6) trade organizations such as the Chambers of Commerce. Contributions to these kinds of organizations are not tax deductible as charitable contributions, but many people can deduct dues to such organizations legally, as business expenses for example.

There are also some nonprofit organizations that are not in the “501 series” at all. Condominium associations, and community associations for planned communities, are organized under state law as nonprofit corporations, but they are not federally tax-exempt under 501(c) like the previously mentioned organizations.

Now, let’s turn back the clock a little to 2010, the year of the “General Excise Tax Protection Act.” That Act is a very nasty law with two pieces. Section 237-9.3 says that if a taxpayer doesn’t file an annual return within a year after it’s due, the taxpayer will lose all credits, deductions, or lower rates. Section 237-41.5 says that if GET is due from an entity but isn’t paid, the Department of Taxation can go after the personal assets of responsible individuals to collect it.

In 2013, a number of nonprofits got jittery about how this law might affect them. In that year they persuaded the Legislature to carve out tax-exempt nonprofits from the personal liability portion of the act, and to have the Department give those nonprofits 90 days’ notice and an opportunity to clean up their act before the exemptions and deductions disappear. But this relief only applies to certain nonprofits such as charities, hospitals, unions, civic leagues, and chambers of commerce. Homeowners’ or community associations were left on their own.

Now here is the issue. Many homeowners’ or community associations only get income from maintenance fees. This kind of income is exempt from GET. But some lesser informed association managers or boards may think “exempt from tax” means “no need to file a return.” That, unfortunately, could have devastating consequences. If no return is filed and a year passes by, the exemption goes away. No notice needs to be given to the association before the exemption disappears. The result would be that the association is liable for 4% (or perhaps 4.5%) GET on all maintenance fees collected, which in all likelihood amounts to a significant number. This liability could be enforced against “responsible persons” such as management companies and board members. Yes, board members. There is no exception for volunteers.

Are you in a condominium, community association, or a planned unit development? Is your association dutifully filing GET annual returns? If not, remember that there is no statute of limitations for a taxpayer that is supposed to file returns but doesn’t, so if there is a problem it can keep on growing. Someone needs to take remedial action before the thermonuclear bomb hits. And if you happen to be a board member, you may be well within the blast radius so you might want to make sure the matter is dealt with.

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