California Tax-Exempt Status Versus Federal Exemption

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

  • Form 3500, Exemption Application
  • Form 3500A, Submission of Exemption Request, if you obtained federal exemption under IRC Section 501(c)(3), (c)(4), (c)(5), (c)(6), or (c)(7).

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

All non tax-exempt corporations incorporated or qualified in California are required to pay at least the $800 minimum franchise tax whether they are active, inactive, operate at a loss, or file a short-period return (less than 12 months).

The following types of nonprofit entities are required to obtain a federal determination letter prior to receiving California tax-exempt status with Franchise Tax Board (FTB):

  • Foreign nonprofits (organized in states other than California).
  • Qualified charitable trusts under R&TC Section 23701d (IRC Section 501(c)(3)).
  • Nonprofit cooperatives under R&TC Section 23701a (IRC Section 501(c)(5)).
  • Voluntary Employee Benefit Associations under R&TC Section 23701i (IRC Section 501(c)(9)).

Federal forms

Contact the IRS for information regarding federal tax exemption. The following forms and publications may help:

  • Publication 557, Tax-Exempt Status for Your Organization
  • Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code
  • Form 1024, Application for Recognition of Exemption Under Section 501(a)
  • Form 1120-H, US Income Tax Return for Homeowners Associations

State and federal differences

California law may differ from federal law with regard to exempt organizations. Contact the IRS for their application process and federal law requirements. Selected major differences are:

Types of entities

California law

Federal law

Nonprofit Entities Must apply for and receive an exempt determination or acknowledgement letter from us to be California tax-exempt.

R&TC Section 23701.

Does not require entities with less than $5,000 in gross receipts to apply for exemption.
Churches Must apply for and receive an exempt determination or acknowledgement letter from us to be California tax-exempt.

R&TC Section 23701d.

Does not require churches to apply for exemption.
Title Holders - Limited Liability Companies including single and multiple members Must apply for and receive a determination letter from us to be California tax-exempt.

R&TC Section 23701h and 23701x.

May be classified as a disregarded entity, multiple member, or association. A disregarded entity is not required to apply for a separate exemption from its single member.

IRC Sections 501(c)(2) and 501(c)(25).

Homeowners' Associations or Mutual Water Companies Must apply for and receive a determination letter from us to be tax-exempt.

R&TC Section 23701t.

No comparable federal section under IRC Section 501(a). Homeowners' Associations may make an annual election for exemption by filing a U.S. Income Tax Return for Homeowners Associations (IRS Form 1120H).

California law patterned after IRC Section 528.

Mutual ditch or irrigation companies California does not have a comparable section under R&TC Section 23701. R&TC Section 24405 may apply for exclusion of membership income. May be exempt under IRC Section 501(c)(12).
Mobile Home Park Acquisition Must apply for and receive a determination letter from us to be California tax-exempt.

R&TC Section 23701v.

No comparable federal section under IRC Section 501(a).
Publicly Funded Financial Entities (certificate of participation) Must apply for and receive a determination letter from us to be California tax-exempt.

R&TC Section 23701u.

No comparable federal section under IRC Section 501(a). However, may be granted exemption status under IRC Section 501(c)(4).
Political Organizations Not required to file an exemption application for tax-exempt status.

Corporations submit a written request for exemption status.

R&TC Section 23701r.

No comparable federal section under IRC Section 501(a).

California law patterned after IRC Section 527.

Civic Leagues, Social Welfare Organizations, and Local Associations of Employees Must apply for and receive a determination letter from us to be California tax-exempt.

California has organizational requirements. The organization's articles of incorporation or creating documents (for unincorporated associations) must have both a dedication and dissolution clause.

R&TC Section 23701f.

In modified conformity with IRC Section 501(c)(4).

Has no organizational requirements.

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