Question: Do Nebraska HOAs and COAs have to file tax returns?

Answer: All Nebraska homeowners and condominium associations are classified under Common Interest Realty Associations and are required to file federal and state tax returns whether incorporated or not. Good news is that even though a tax return is a requirement, it does not mean your COA owes the state any tax.

One very rare case to avoid filing is to apply to be a Non-Profit entity under section 501(a) (4), Form 990. However, it requires a lot of investing in research, paperwork and time trying to persuade IRS. You must produce evidence showing that areas owned by a homeowner association like park lands and roadways are actually used by the general public and not limited to their members only.

Options for HOAs and COAs

1. Form 1120

Nebraska HOAs and COAs have two options to file their tax returns; they could file using Form 1120, which is a traditional corporate method. While it boasts an advantage of being flexible with the expense allocation, (they do not have to maintain the 90% rule), and lower tax rates, (15% tax rate for the first $50,000 of their taxable income), they do not favor HOAs and COAs.

First, all association’s income becomes taxable; any funds set aside or in excess of expenditure will be taxed. Second, they have proven to be complex, requiring some level of accounting and bookkeeping that most associations do not keep. Associations are also required to make an estimate of their payable tax which is a hard task to accomplish.

2. Form 1120–H

Most associations elect to use the second option, to be taxed under section 528 of the IRC, and to file Form 1120–H instead of Form 1120. To qualify for this treatment, COAs and HOAs must meet the following criteria:

1. 60% of revenue is gained from members and not the sale of goods and services.
2. 90% of its expenditure is on operations and maintenance of the property.
3. 85% of units should mostly be used as residences.
4. Income cannot be used to benefit association members.

Filing Form 1120–H means most of the HOA’s income falls under exempt function income, and are not taxable. Income is tax exempt if generated from:

• Association dues and assessments;
• Fines and fees from Architectural Control Committees;
• Late fees and interests on late assessment payments;and
• Resident clubhouse and other facility rentals.

Taxable association income is generated from:

• Interest from banks and dividends;
• Guest fees, such as golf-course usage;
• Renting facilities like clubhouse;
• Payment for easements, like cell towers.

Deductible expenses are then taken against the income. A $100 deduction is allowed on taxable income, and a flat rate of 30% applied.

Electing to File Form 1120-H

Nebraska homeowner and condo association elects to take advantage provided under section 528 by filing Form 1120–H annually, before its due date, including extensions. Once an association has filed Form 1120–H, revoking it will be impossible unless IRS consents to it. HOA will have to request IRS consent by filing a ruling request; a fee is applicable for every ruling request applied.

If an HOA fails to file Form 1120–H by its due date, they get an automatic 12 months extension to make an election, after that they may lose the chance to file Form 1120 – H that year being forced to file Form 1120 and incur penalties on late tax payment. Homeowner associations or condo associations have the liberty to compare total tax payable by Form 1120 with that payable by Form 1120 – H and file the form with a lower tax. This form is difference from a form for a retirement plan.

Make sure that you discuss your tax situation with a qualified HOA CPA. They will make sure that your filing is prepared accurately and timely.

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.

Conclusion

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.

Being a resident in the state of Maine probably means that you are in living in a community with that has an organization that governs the shared facilities such as your neighborhood parks, the roadways, recreation centers, and even the water treatments facilities. Both you and your association may be puzzled when it comes to questions like:

Do you have to file taxes?  Is my association obligated to pay Franchise and Income tax to the state? What form do we file?

Each of these questions has an answer that can be difficult to answer sometimes. This article should assist you in beginning to answer some of these tricky questions.

Do Maine HOAs have to file tax returns?

HOAs in the state of Maine are required to file Articles of Incorporation with the Secretary of State which makes them corporations that must file taxes just like any other corporation around the country. In very rare cases Homeowner’s Associations may be able to avoid filing by applying for Non-Profit status under section 501(a)(4), form 900. This option requires extensive investigating and a large amount of paperwork.

Per Maine’s law, a homeowner’s association is exempt from having to pay state franchise or income tax if it made up only residential properties. Associations that include commercial properties are subject to pay these taxes. This law has been very confusing for many HOAs and has caused them to have to amend prior tax returns, often facing penalties and interest for late payments of these taxes.

It is required that the income generated by residential homeowner’s association come only from member services such as preservation, maintenance, or management in order to avoid paying income taxes at both the federal and state level.

Filing Options for Maine HOAs & Condo Associations

Both COAs and HOAs have two different options to file their tax returns. Using form 1120 (the traditional approach used by corporations) which is flexible in regards to expense allocation as it does not require HOAs to maintain the 90% rule, and has a lower tax rate of 15% applied to the first $50,000 of taxable income.

Unfortunately, it is very complicated for most HOAs to file as it required a good level of accounting and bookkeeping that most HOAs do not regularly keep. In addition it subjects all of the HOA’s income to taxes; any money in excess of expenses will be taxed.

There is a second option that HOAs can utilized, which is to be taxed under section 528 of the IRC, where they will file Form 1120-H. To meet the requirements for this filing HOAs and COAs in Maine must meet the following measures:

1. 60% of revenue is gained from members and not the sale of goods and services.
2. 90% of its expenditure is on operations and maintenance of the property.
3. 85% of units should mostly be used as residences.
4. Annual residual income must not be used to benefit association members.

Under this filing option most of the income will not be taxable. Taxable income comes from dividends, interest, guest fees, rental of facilities, and payments for easements. Under this filing option though, the association is allowed to carry forward any excess in order to offset future payments.

Expenses that are incurred specifically to generate the taxable income are deducted; a $100 deduction is permitted on taxable income with an applied flat rate of 30%.

Many Iowa homeowner and condo associations do not know about the requirement to file tax on their association and therefore do not file. An estimated 35% of Iowa HOAs and condo associations don’t file, and if they file, they are using a wrong process. Most of these are the self-managed associations. This is what members should know about your association’s tax requirements and how to file accurately and timely.

Each corporate entity organized under the laws of Iowa or qualified to do business within this state or doing business within Iowa, shall file a true and accurate return of its income or loss for the taxable period. The return shall be signed by the president or other duly authorized officers.

If the corporation was inactive or not doing business within Iowa, although qualified to do so, during the taxable year, the return must contain a statement to that effect.

Iowa HOA Tax Filing Options

Homeowner and condo associations described Internal Revenue Code Section 527 which are domiciled in this state and are required to file Form 1120 and pay federal corporate income tax are subject to Iowa corporations’ income tax to the same extent as they are subject to federal corporate income tax.

Homeowner and condo associations described in Internal Revenue Code Section 528 which are domiciled in this state and are required to file federal Form 1120–H and pay federal corporate income tax are subject to Iowa corporation income tax to the same extent as they are subject to federal corporate income tax.

This is a comprehensive term that includes all activities or any transactions for the purpose of financial or pecuniary gain or profit. Irrespective of the nature of its activities, every corporation organized for profit and carrying out any of the purposes of its organization shall be deemed to be “doing business.”

In determining whether a corporation is doing business, it is immaterial whether its activities actually result in a profit or loss. Taxable income is generated from:

• Interest from banks and dividends.
• Guest fees, such as golf-course usage.
• Renting facilities like a clubhouse.
• Payment for easements, like cell towers.

Exempt-function income must be generated from:

• Association dues and assessments.
• Fines and fees from the Architectural Control Committee.
• Any delinquency or late fees on late assessment payments.
• Resident clubhouse and other facility rentals.

To arrive at the net taxable amount, the association should deduct expenses incurred to generate this taxable income. A $100 standard deduction is allowed on any taxable income.

Electing to File Form 1120–H

By filing Form 1120–H, Iowa homeowner associations find themselves with a reduced tax burden. To enjoy this, an association must file Form 1120 – H annually, before its due date, including extensions. Once an association has filed Form 1120 – H, they cannot revoke it unless IRS consents to it.

Should an association fails to timely file Form 1120–H by the due date, they may permanently lose the right to file Form 1120–H. At this point, they will be forced to file Form 1120 and may incur late payment penalties.