Did You Know that Your Nonprofit Organization is Exempt from Paying Property Taxes?

At a glance

• Main takeaway: Did you know that nonprofit organizations, by law, can also be exempt from paying property taxes? In the State of California, the Welfare Exemption provides just that for both real and business personal property if used exclusively for purposes directly related to the nonprofit.
• Impact on your business: California is widely known to have high property tax rates, and the Welfare Exemption could provide your organization significant savings.
• Next steps: Aprio’s Tax Exempt and Nonprofit CPA Services team guide you through the complexities of this provision to determine your nonprofit’s eligibility.

Schedule a consultation with Aprio today

The full story:

It’s common knowledge that nonprofit organizations generally do not pay income tax. However, did you know that nonprofit organizations that qualify for federal tax-exempt status are, by law, also exempt from paying property taxes?

In the State of California, this exemption is known as the Welfare Exemption, which was first adopted by voters as a constitutional amendment in 1944. Legislation in the Revenue and Tax Code (§214) was then enacted to implement the provisions of the amendment. The Welfare Exemption provides that both real (i.e., land and buildings) and business personal property that are used exclusively for religious, hospital, scientific, or charitable purposes are eligible for a property tax exemption. Certain educational purposes and activities may also qualify if they:

• Benefit the community as a whole and
• Include the study of relevant information and then the dissemination of that information to interested members of the general public and the participation of such interested members of the general public.

Taking advantage of this valuable exemption is a two-part process

First, the organization must submit a claim form to the State Board of Equalization (BOE) with copies of:

• IRS 501(c)(3) or Franchise Tax Board 23701(d) letter of determination
• Articles of Incorporation and all amendments certified by the California Secretary of State
• Financial statements for the years the exemption is claimed

If the BOE determines that the organization is eligible for the exemption, it will issue an Organizational Clearance Certificate.

The next step is to submit a claim form to the Assessor in the county in which the property is located, along with a copy of the BOE Certification. The county Assessor will then determine whether the use of the property qualifies for the exemption.

Not all property will qualify for the exemption

Since there are many factors that are taken into consideration, it’s important to note that not all property held by a nonprofit organization will automatically qualify for the Welfare Exemption. Exempt property must be owned and operated by the qualifying organization, and the property must be used exclusively for qualifying purposes and activities. The property must also be reasonably necessary to accomplish the organization’s qualifying purpose. Exclusive use, however, may include purposes that are incidental to and reasonably necessary for the accomplishment of the charitable purpose.

For example, it is not uncommon for a hospital to operate a gift shop on its premises. This would not disqualify the property from the Welfare Exemption. However, the operation of a thrift shop would. The distinction being that a gift shop is a reasonable ancillary function of a hospital whereas a thrift shop is not generally considered necessary to the fulfillment of a hospital’s purpose.

In addition to the restrictions on use, California law further requires that an organization’s formation documents include a statement that the qualifying property is irrevocably dedicated to one of the four previously mentioned qualifying purposes, and that in the event the organization ceases operations, the qualifying property will be transferred to another fund, foundation, or corporation organized and operated for similar purposes.

The bottom line

Certain transactions such as rental of the qualifying property for meetings by other exempt organizations, leasing to other exempt organizations, fundraising activities and activities that generate unrelated business taxable income can raise issues of whether a property qualifies for the full exemption, or only a partial exemption.

California is widely known to have above average property tax rates, and the Welfare Exemption could provide hefty savings for your organization. Before initiating these types of transactions, you should connect with your tax advisor as you may be subject to potential consequences. Aprio’s Tax Exempt and Nonprofit CPA Services team can help you navigate the complex compliance of the provision to determine if you qualify for the Welfare Exemption.  

Schedule a consultation with Aprio’s Tax Exempt and Nonprofit CPA Services team today.