Alaska has amazing homes grouped into Common Interest Communities (CIC). Owning a condo, townhome or a single family home within these CICs ensures that you are free from all responsibilities of home ownership, such as landscaping or snow removal. You enjoy your home knowing that you are free from untidy neighbors who find it hard to mow their lawns, or just do their repairs on the driveway.
A condo or homeowner associations consist of homeowners in these communities, and a board of directors elected to oversee the enforcement of the covenants, codes, and restrictions set by the community. Dues and assessment fees are paid to the association by the homeowner to ensure the provision of services that one could have done living outside the community.
Tax Return Facts
Fact 1: Federal Tax Returns – Homeowner and condominium associations are required to file federal tax returns. HOAs and COAs are registered as non-profit corporations and are required to file federal tax returns just like any other corporation. Good news is that even though a tax return is a requirement, it does not mean an HOA or COA owes any federal tax.
Fact 2: State Income Tax – Alaska is the only state that does not collect state income tax; this is because the state enjoys high revenues from petroleum products. The state repealed state income tax in 1980, also eliminated sales tax. On top, residents receive Alaska Permanent Fund Corp. each year.
Associations do not pay state income tax because the residents are not subjected to personal income tax, associations income passes from owners income, therefore not subject to taxation. Corporation income tax is also graduated; an association with taxable income less than $25,000 has a 0% tax rate. Not many HOAs or COAs can generate that kind of taxable income.
Fact 3: Federal Form 1120-H – HOAs and COAs generally file Form 1120 – H. It has a standard calculation which only takes into account the non-exempt income generated by an association. It has a $100 allowable deduction on taxable income and uses a flat tax rate of 30%.
Fact 4: Federal Form 1120 – In case of excess non-exempt income, Form 1120 could be used to file tax. This form is a little complex when compared to Form 1120 – H, it also takes into account all income generated, but it has a lower tax rate of 15% for the first $50,000 taxable income. Not many associations generate that much income.
Fact 5: Income Categories (Form 1120-H) – HOAs and COAs have two types of income: Exempt function income is income generated from membership engagements, like dues, fees, assessments, and interest charged on members for late submissions. Non-exempt function income is generated from other activities the association undertakes other than to their members, for example, income from bank interest, rented facilities like clubhouses and non-member use of property like a vending machine.
Fact 6: Deadlines – Tax returns are due on 15th March if your association follows a normal calendar year. If your association follows a different calendar year, returns are due on the 15th day of the third month after year end. However, if you fail to beat the deadline, you could file for an extension. Form 7004 is used to file for an extension, however, you will still need to pay fines for late returns from the date the returns were due to present.
Fact 7: Carryforward – Excess income can be carried over to the next tax year. Revenue ruling 70 – 604 allows HOA and COAs to differ and possibly avoid taxation on this excess. Any excess is treated as if it was refunded to the association members and, accordingly, repaid to the association similar to a subsequent year assessment. But only if you file Form 1120.
Fact 8: Form 1120-H Election – Do an election for Form 1120 – H before its due date that is 15th March, including extensions. Once your association has filed Form 1120 – H, revoking it will be impossible unless IRS consents to it. If you fail to file Form 1120 – H by its due date, you have a 12 month extension to make the election, after that, you may lose the chance to file Form 1120 – H that year and be forced to file Form 1120 and incur penalties on late tax payment.
Form 1120 – H simplifies the tax process for most Alaska HOAs and condo associations. It is a rather simple form as it carries lower audit risk as long as the section 528 requirements are met. Tax-exempt function income will be excluded from taxation. Form 1120 is not specifically designed for HOAs, but some may consider as a result of carryovers.