Non Profits?

Question

Last week, I had asked a question regarding the taxability of a non profit corporation. In retrospect, I now realize that perhaps I should have been more specific.
I live in a community that is governed by a Homeowner's Association.
I have been told, that the Homeowner's Association is required to file an 1120H with the IRS. In the past, the association has never been required to pay income taxes. However, in filing the 2006 tax return, we were required to pay approximately $3,650 in tax to the IRS.
What would have caused this? Under what section of the IRS code would I find additional information regarding Homeowner's Associations and what might or might not be taxable?

Answer 1

The filing requirement is covered in 26 USC 528

Answer 2

A non-profit is not necessarily tax-exempt. And even a 501(c)3 tax exempt organization can be taxed on income from sources unrelated to its tax-exempt purpose.

Sounds like the organization showed a profit for last year, and previously hadn't.

Maybe some of the CPA's on this board can give you information. Or you could lay the most recent return side by side with the previous year, and see what changed so much. Did you have a CPA prepare the returns, and if so, what did he or she say?

Answer 3

Non profits and charities can be subject to income tax, if they have UBTI (Unrelated Business Taxable Income).

This is a complex area of the tax code, but basically it is there to put a non profit on an equal footing as a for profit business. In your case, the home owner's assn likely had UBTI from some of their activities. Check with their accountant.

Here is an example. Newman's Own. It is actually a charity ... but since it is a business that is unrelated to it's charitable goal ... it has to pay income tax on it's earnings. Read their labels closely and you will see that all proceeds, after tax, goes to charity.