J & N REALTY, INC.

California Franchise Tax Board: Exempt Organizations  

Business Leagues, Civic Leagues, Homeowners’ Associations, Schools; 

Cemeteries, Credit Unions, Labor Unions, Scientific Organizations; 

Chambers of Commerce, Educational Organizations, Literary Organizations, Social Clubs; 

Charitable Organizations, Employee Associations, Recreational Organizations,  Veterans’ Organizations; 

Churches, Fraternal Societies, Religious Organizations, Voluntary Employee Beneficiary Associations 

WHAT DOES TAX-EXEMPT MEAN TO THE FRANCHISE TAX BOARD? 

Overview of Exempt Organizations  

Introduction  

People commonly refer to tax-exempt organizations as nonprofit organizations. Although tax-exempt entities are generally nonprofit, some tax-exempt entities are for-profit.  

This publication explains the laws applicable to California tax-exempt organizations, including:  

- Differences between federal and state exemptions 

- What we may disclose about a specific organization 

- Filing requirements 

- Unique provisions 

Assembly Bill 897, effective January 1, 2008, allows the State of California to acknowledge the tax-exempt status of organizations that obtained federal tax exemption under the Internal Revenue Code (IRC) Section 501(c)(3).  

Tax-Exempt Status  

To receive tax-exempt status in California, the organization files one of the following with the Franchise Tax Board (FTB):  

- Form 3500, Exemption Application  

- Form 3500A, Submission of Exemption Request  

Exempt vs. Nonprofit  

We consider a tax-exempt entity as a corporation,  unincorporated association, or trust that submits one of the following:  

- Form 3500, Exemption Application, and received a determination letter from us that states it is exempt from California franchise or income tax (California Revenue and Taxation Code (R&TC) Section 23701).  

- Form 3500A, Submission of Exemption Request, a copy of the federal determination letter issued by the Internal Revenue Service (IRS) approving the organization’s tax-exempt status under IRC Section 501(c)(3), and received an acknowledgement letter from us that states it is exempt from California franchise or income tax (R&TC Section 23701).  

A nonprofit entity does not have shareholders or owners. We characterize it according to how it was created.  

Nonprofit corporations incorporate through the California Secretary of State (SOS) under one of the following parts of the California Nonprofit Corporation law:  

- Nonprofit Public Benefit Corporations 

- Nonprofit Mutual Benefit Corporations 

- Nonprofit Religious Corporations 

- Corporation Sole.  

An unincorporated association is nonprofit if its creating document contains nonprofit language. A creating document may be one of the following types of documents:  

- Articles of association 

- Bylaws  

- Constitution 

- Trust instrument  

- Other documents that set forth how the association will operate.  

Confidentiality  

We may not disclose the business and financial matters of a tax-exempt organization to the public; however, once we grant or acknowledge tax-exempt status, we may disclose information included with Form 3500 or Form 3500A. If we deny exemption, that information remains confidential.  

Federal and State Disclosure Law  

Federal law regarding disclosure of information about tax-exempt organizations is different from California law. It requires IRS to disclose certain business details and financial information.  

Federal and State Exemption  

Although most California laws deal with tax exemption patterned after IRC, obtaining state exemption is a separate process from obtaining federal exemption. To obtain state tax-exempt status, submit one of the following:  

- Form 3500, Exemption Application, if you do not have federal exemption or have obtained federal exemption, but not under IRC Section 501(c)(3).  

- Form 3500A, Submission of Exemption Request, if you obtained federal exemption under IRC Section 501(c)(3).  

State Tax-Exempt Status  

If you do not obtain state tax-exempt status for your organization, it remains subject to the California R&TC as a taxable entity.  

California law differs from federal law with regard to exempt organizations. We list the major differences below:  

- Churches and small charities apply for state tax-exempt status by submitting Form 3500, Exemption Application, or if the entity is federally exempt under IRC Section 501(c)(3), by submitting Form 3500A, Submission of Exemption Request. Until we issue a determination or acknowledgement letter, the organization remains a taxable entity.  

Group Exemption:  

- Allows the parent organization to obtain tax-exempt status for its subordinates.  

Homeowners’ Associations:  

- For California purposes, an organization is not exempt as a homeowners’ association until it applies for and receives an exempt determination letter from us. For federal purposes, an association may make an annual election for exemption by filing a U.S. Income Tax Return for Homeowners’ Associations (IRS Form 1120H).  

- For detailed information about homeowners’ associations, get FTB Pub. 1028, Guidelines for Homeowners’ Associations. Go to ftb.ca.gov and search for 1028.  

- Farm cooperatives are not exempt from tax under California law, but federal law may allow exemption with IRS.  

- Mutual ditch or irrigation companies may be exempt under IRC Section 501(c)(12). California does not have a similar law; however, a mutual water company may qualify for exemption as a homeowners’ association.  

Contact IRS for information regarding federal tax exemption. The following federal forms may be helpful:  

- Tax-Exempt Status for Your Organization (Pub. 557).  

- Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code (Form 1023).  

- Application for Recognition of Exemption Under Section 501(a) for Determination Under Section 120 of the Internal Revenue Code (Form 1024).  

Incorporation as a Nonprofit Corporation  

Incorporating under the California Nonprofit Corporation law does not mean the organization is exempt from California corporation taxes, regardless of the language in the Articles of Incorporation or the status of the organization for federal purposes.  

To obtain exemption from California income or franchise tax, the corporation files one of the following with us:  

- Form 3500, Exemption Application.  

- Form 3500A, Submission of Exemption Request, with a copy of the federal determination letter from the IRS approving the organization’s tax-exempt status under IRC Section 501(c)(3).  

A nonprofit corporation that does not have an exempt determination or acknowledgement letter from us is subject to the same franchise tax laws as any for-profit corporation. It must file Form 100, California Corporation Franchise or Income Tax Return, with us and pay at least the minimum franchise tax each year until it formally dissolves through SOS.  

Unincorporated Associations or Trust  

If an unincorporated association or trust seeks tax-exempt status, it files Form 3500, Exemption Application, or Form 3500A, Submission of Exemption Request, with us and provides all required documentation outlined on the form.  

If the organization is:  

- An unincorporated association, it files Form 100, California Corporation Franchise or Income Tax Return, with us and computes its tax using the general corporation tax rate. It does not pay the minimum franchise tax.  

- A trust, it files Form 541, California Fiduciary Income Tax Return, with us and computes its tax using the appropriate trust tax rate.  

Filing Requirements  

If your organization is tax-exempt for California purposes, you may need to file one or more of the following returns with us:  

- Form 199, California Exempt Organization Annual Information Return.  

- Form 109, California Exempt Organization Business Income Tax Return.  

- Form 100, California Corporation Franchise or Income Tax Return.  

For detailed information about state filing requirements, fees, and penalties, see Pub. 1068, Exempt Organizations -Requirements for Filing Returns and Paying Filing Fees. Go to ftb.ca.gov and search for 1068.  

Form 199, California Exempt Organization Annual Information Return  

The requirement to file Form 199 is generally based on the normal amount of total gross receipts and pledges. We define “normal” as a three-year average.  

If gross receipts and pledges are normally:  

- Less than or equal to $25,000, you are not required to file Form 199.  

- Greater than $25,000, you are required to file Form 199.  

Exceptions: Regardless of the total amount of gross receipts:  

- Private foundations must file Form 199 every year.  

- Churches, pension trusts, IRAs, and political organizations do not file Form 199.  

Use this table to decide if you must file Form 199.

 File Form 199 on or before the 15th day of the 5th month after the close of your organization’s taxable year. For example, if the taxable year ends on December 31, the return is due on May 15.  

If you file Form 199, you pay a filing fee with the return. The amount depends on when you file and when you make the payment.  

The fee is $10 if: 

- You file and pay by the original due date 

- You file and pay after the original due date, but on or before the extended due date.  

The fee is $25 if:  

- You file by the original due date, but pay after that date 

- You file and pay after the extended due date.  

Exception: The filing fee does not apply to the following organizations exempt under R&TC Section 23701d:  

- Exclusively religious organizations.  

- An exclusively educational organization if the organization normally maintains a regular faculty and curriculum and normally has a regularly organized body of students in attendance at the place where its educational activities are regularly carried on.  

- An exclusively charitable organization or an organization for the prevention of cruelty to children or animals, if the organization is supported, in whole or in part, by funds contributed by the United States or any state or political subdivision thereof, or is primarily supported (50 percent or more) by contributions from the general public.  

- An organization operated, supervised, or controlled by or in connection with an exclusively religious organization.  

We impose a penalty if you do not file your organization’s Form 199 by the extended due date, regardless of whether you pay the fee. The penalty is $5 for each full month, or part of a month, the Form 199 is late. The maximum penalty is $40. We impose the penalty from the original due date of the return.  

For further information regarding due dates or extended due dates, go to ftb.ca.gov and search for 199.  

Form 109, California Exempt Organization Business Income Tax Return  

Generally, a tax-exempt organization files Form 109 when its income exceeds $1,000 from a trade or business unrelated to its exempt purposes — even if the profits are used for exempt purposes.  

Exception: Homeowners’ associations and political organizations file Form 100 instead of Form 109 if they have taxable income.  

The computed tax rate depends on how the organization was created.  

- An incorporated organization or an unincorporated association computes its tax using the general corporation tax rate.  

- A trust computes its tax using the appropriate trust tax rate.  

The due date for filing Form 109 depends on how the organization was created.

- An incorporated organization, unincorporated association, or a trust other than a pension trust or IRA files on or before the 15th day of the 5th month after the close of its taxable year. For example, if the taxable year ends on December 31, the due date is May 15.  

- A pension trust or IRA files on or before the 15th of the 4th month after the close of its taxable year. For example, if the taxable year ends on December 31, the due date is April 15.  

We impose the same types of penalties and interest on California tax-exempt organizations as we impose on for-profit corporations.  

Form 100, California Corporation Franchise or Income Tax Return  

Homeowners’ associations and political organizations with income in excess of $100 from nonexempt functions file Form 100 and use the general corporation tax rate to compute the tax.  

- These organizations do not pay the minimum franchise tax.  

- Homeowners’ associations may also need to file Form 199.  

File Form 100 on or before the 15th day of the 3rd month after the close of the organization’s taxable year. For example, if the taxable year ends on December 31, the return is due on March 15.  

We impose the same types of penalties and interest on homeowners’ associations and political organizations as we impose on for-profit corporations.

Exception: We do not require political organizations to make estimate payments; therefore, we do not impose the estimate penalty on them.  

Group Exemption  

A parent, state, district, or like organization seeking state tax-exempt status for its California subordinates may file on their behalf either:  

- Form 3500, Exemption Application.  

- Form 3500A, Submission of Exemption Request, if the entity obtained federal exemption under IRC Section 501(c)(3).  

Before group exemption is submitted, the parent organization must first or simultaneously receive tax-exempt status.  

For detailed instruction about group exemption, get Form 3500, Exemption Application, or Form 3500A, Submission of Exemption Request. Go to ftb.ca.gov and search for 3500.  

Group Filing  

A parent, state, district, or like organization may file a group return on Form 199 for two or more subordinate organizations.  

Two of the requirements for group filing are:  

- Each organization included in the group return must be exempt from tax by the Franchise Tax Board.  

- Each organization must have the same taxable year-end.  

For detailed instruction about group filing, get Form 199, California Exempt Organization Annual Information Return. Go to ftb.ca.gov and search for Form 199.  

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