AVOID JOUSTING with the IRS

An Overview of Association Income Taxation

By Cyndi Rempert, CPA

book series and TV show Game of Thrones, you know that the former of this pessimistic pair is certainly true. If you are involved with an association, however, you may not be so sure about the latter. There are a few things regarding association income taxes that may not be common knowledge, and this article intends to shed some light on the subject. The topic of taxation in the association industry does not have to be as complicated as keeping up with the copious cast of characters and various Houses in Game of Thrones!

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One popular assertion often heard is “Our association is not-for-profit, so we don’t have to pay any taxes.” Frequently, people confuse a not-for-profit association with a charitable organization (spoiler alert: even charitable organizations have to file informational returns with the IRS). “Not-for-profit” means the intent of the entity is to generate funds to accomplish the goal of the organization, not to turn a profit. Some charitable organizations may be exempt from sales and income taxes, but they must be deemed to be a 501(c)(3) organization by the IRS, and must receive that determination in writing from the IRS. Typically, this refers to charities, churches and other charitable organizations… not common interest realty associations.

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In many cases, associations end up not owing income taxes. Many associations have very few types of income that are subject to taxation, since a majority of the average association’s income comes from assessments, late fees, and other income items received from homeowners, or “membership” sources. Membership income is generally exempt from tax.

Though the IRS may deem assessment income to be exempt from tax, it will not consider ancillary or nonmembership income items such as interest, rent, etc. exempt from tax. The primary type of income

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