Almost all members of a homeowner or condo association ask this question, even the board elected to manage the HOAs or COAs. This is because HOA and COA taxations have different forms to be filed, rules and regulations regarding not-for-profit associations and exempt functions which makes taxation questions a bit tricky to answer.
Homeowner or condo associations are treated as corporations for tax purposes, even if an association was incorporated under Arkansas State Secretary as a non-profit corporation. In fact, missing, late or incorrect tax return subjects the association to fines, IRS penalties and even loss of non-profit status. An association can, however, file for a recognition and acceptance as a nonprofit by IRS in some cases. But obtaining this status can be difficult and expensive.
All corporations are required to file Form 1120, U.S. Corporation Income Tax Return every year. This form is a little complex for homeowner and condo associations and it takes into account all income generated for tax purposes. The better side is that it has a lower tax rate of 15% for the first $50,000 taxable income. Not many associations generate that much income and the 90% expense rule does not apply.
Most of Arkansas homeowner and condo associations elect to file Form 1120-H. Form 1120 – H is designed specifically for homeowner and condo associations and is much easier and has no tax risk if the association meets IRC Section 528 requirements of;
1. Over 60% of gross revenue is from members and does not result from the sale of goods and services.
2. Over 90% of the expenditures is on maintenance, repairs and operations of the association.
3. At least 85% of the units should be residential.
4. Annual residual income must not be used to benefit association members.
If the above requirements are met, an association’s “non-exempt” function income is taxable. 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. Taxable income is then allowed a $100 deduction and a flat tax rate of 30% is used.
Tax returns are due on the April 15th if the association follows a standard calendar year. If the association follows a fiscal year, tax returns are due on the 15th day of the third month subsequent to the year-end. However, if you are unable to timely file, an extension is available. 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.
You should ensure that your HOA or condo association files relevant federal tax forms with the IRS before its deadline, even if you have no tax to file, you do not want to start a friction with IRS. Form 1120-H is recommended but some associations sometimes choose to take advantage of the 15% tax rate offered by Form 1120. Always ensure to contact a CPA to help you with your HOA or condo association tax returns.