Must a federally tax-exempt homeowners association still file a Texas franchise tax report, and how can it get exempt?

Plain-English summary

A homeowners association that is exempt from federal tax asked whether it still has to file a Texas franchise tax report. The answer: yes, unless it substantiates a Texas exemption.

• Franchise tax reaches nonprofits. The Texas franchise tax is imposed on all corporations, including nonprofit corporations. A federal exemption does not automatically carry over.
• Route 1 - the homeowners-association exemption (Sec. 171.082). Exemption is available for a nonprofit organized and operated primarily to obtain, manage, construct, and maintain the property in or of a residential condominium or residential real estate development, if voting control is vested in the owners of the individual lots or residential units - not a developer, declarant, bank, investor, individual, or other party. To claim it, the association must send copies of:
  • file-stamped articles of incorporation and bylaws;
  • the declaration, covenants, or deed restrictions;
  • the plat of the development;
  • the total number of lots or units;
  • the name of each owner and the date they bought their lot/unit; and
  • the date owners gained 51 percent of the votes.
• Route 2 - a federal 501(c) exemption (Sec. 171.063). If the association holds a federal exemption under IRC 501(c)(2), (3), (4), (5), (6), (7), (8), (10), (16), (19), or (25), it can provide a copy of the complete and current IRS determination letter.
• Meanwhile. After the Comptroller reviews the information, it will notify the association whether it is no longer required to file franchise tax returns. Until then, the association must keep filing.

Currency note: This letter describes the pre-2008 franchise tax (replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928). The exemptions continue under current law; confirm present terms.

What this means for you

Homeowners associations assuming federal exemption is enough

It is not. Texas taxes nonprofit corporations under the franchise tax, so a federally exempt HOA must still either prove owner voting control (Sec. 171.082) or supply a qualifying IRS determination (Sec. 171.063) - and keep filing until the Comptroller confirms the exemption.

Boards preparing the exemption package

Gather the full documentation set up front (articles, bylaws, declaration/deed restrictions, plat, owner list, and the date owners reached 51 percent of the votes). That control date is the linchpin of the Sec. 171.082 exemption.

Common questions

Q: Does a federal tax exemption excuse an HOA from Texas franchise tax filing?
A: No. The franchise tax applies to all corporations, including nonprofits; the association must substantiate a Texas exemption.

Q: What proves the Sec. 171.082 exemption?
A: Documentation that voting control is vested in the individual lot/unit owners - articles, bylaws, declaration/deed restrictions, plat, owner list, and the date owners gained 51 percent of the votes.

Q: What if the HOA has an IRS 501(c) determination?
A: It can seek the Sec. 171.063 exemption by providing a copy of the complete and current IRS determination letter.

Citations and references

Statutes:

• Texas Tax Code Sec. 171.082 - franchise-tax exemption for a nonprofit organized/operated primarily to obtain, manage, construct, and maintain residential condominium/development property, with voting control in the individual owners
• Texas Tax Code Sec. 171.063 - franchise-tax exemption for a nonprofit federally exempt under the listed IRC 501(c) paragraphs

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200203855L

Original ruling text

Date: March 8, 2002

To: ***

From: Irene Cage

Subject: Franchise tax for Homeowners Association

Dear ***,

Thank you for your recent correspondence. Your question is whether a
homeowners' association is required to file a Texas franchise tax report. The
corporation is exempt from federal tax.

The Texas franchise tax is imposed on all corporations, including nonprofit
corporations. Exemption may be available for the corporation if you are able
to provide us with certain information to substantiate exemption.

For example, Section 171.082 of the Texas Tax Code provides exemption for
nonprofit corporations if they are organized and operated primarily to obtain,
manage, construct and maintain the property in or of a residential condominium
or residential real estate development if voting control of the organization is
vested in the owners of individual lots or residential units. The voting
control cannot be vested in a developer, declarant, bank, investor, an
individual or other party.

The Tax Code is available online at
http://www.capitol.state.tx.us/statutes/txtoc.html.

We will be happy to consider your corporation for exemption. Please send the
request to the Exempt Organizations Section, Post Office Box 13528, Austin,
Texas 78711-3528. The request must include the following:

• file stamped articles of incorporation; bylaws;
• declaration, covenants or deed restrictions;
• plat of the residential real estate development;
• the total number of lots or units within the development;
• the name of each owner and the date they bought their lot or unit;
• the date the individual resident owners gained 51 percent of the votes

Additionally, Section 171.063 provides exemption for a nonprofit corporation
that has been granted federal exemption under Sections 501(c)(2), (3), (4),
(5), (6), (7), (8), (10), (16), (19) or (25) of the Internal Revenue Code. If
your corporation has been granted federal exemption under one of these sections
of the Internal Revenue Code, provide us with a copy of the complete and
current determination letter from the IRS.

Once we have reviewed the information, we will notify you if the corporation is
no longer required to file franchise tax returns.

Please let me know if you have additional questions. The email address is
. I can be reached toll free at 1-800-531-5441,
extension 3-2995. The local number is 512/463-2995.

Thanks,

Irene Cage
Exempt Organizations Section