The Difference Between Non-Profit and Tax Exempt
March 21, 2014

In representing condominium and homeowners associations, I often have to correct misinformation about the nature of such entities.  Recently, I have seen many members and Boards mention that their associations are 501(c)(3)’s.  They are not.

This is a common misconception regarding the nature of condominium and homeowners associations.  In Tennessee mandatory condominium and homeowners associations are created as non-profit corporations under the provisions of the Tennessee Nonprofit Corporation Act, Tenn. Code § 48-51-101, et seq. (the “Act”).  As non-profit corporations, the associations are merely corporations that do not have a profit motive.   The associations are more properly defined, under the Act, as mutual benefit non-profit corporations.  They are mutual benefit in that the purpose of the association is to provide benefits for all the members of the corporation.  For example, the maintenance of the common areas and common elements mutually benefit all members.  In regular corporations, the purpose of the entity is some business purpose ultimately geared towards making a profit.  Thus, the distinction solely has to do with whether the entity is intended to make a profit.

When an entity states that it is a “501(c)(3)” entity, it is referring to 26 U.S.C. § 501(c)(3), which is a provision of the Internal Revenue Code.  This section of the Internal Revenue Code addresses certain tax-exempt entities.  Donations to these tax-exempt entities are tax deductible.  For example,  when you make a donation to the American Red Cross or the Salvation Army, that donation is deductible on your taxes because, while those entities are non-profit they have also qualified under the provisions of 26 U.S.C. § 501(c)(3).  Applying for federal tax-exempt status can be an arduous process.

To my knowledge, no condominium or homeowners association in the State of Tennessee has successfully applied for such a classification.  Thus, while associations are non-profit, they are not tax exempt.  This means that the payment of assessments is not tax deductible.  I can understand the confusion, but it is important to note that associations are not federally tax exempt entities under 26 U.S.C. § 501(c)(3).

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