You may live in an Ohio community with an association created in order to own one shard facility such as parks, roads, or water treatment facilities. The association probably has several unanswered questions:
1. Do we have to file taxes?
2. Is my association subject to Franchise and Income Tax in Ohio?
3. Isn’t my association exempt for paying taxes?
4. Do we file a Form 1120 or 1120-H?
This article will clarify each of these questions one by one and tell you everything you need to know about Homeowners Associations and their taxation.
Do Ohio HOAs File Tax Returns?
Ohio homeowners associations must file the Articles of Incorporation with the Security of State, and then, are considered to be corporations and are required to file taxes just like any other corporations across the country. In the unusual situation to avoid having to file the HOA may apply to be Non-Profit entity under section 501(a)(4), form 990. However, this option will take a good amou8nt of investing in research and paperwork.
Franchise and Income Tax in Ohio
Under tax law in Ohio, a HOA is exempt from the state franchise tax if it is solely comprised of residential properties. Associations that are comprised of commercial property do not get to take advantage of this exemption. This law often causes a lot of confusion among many HOA management boards and most often associations are found amending past tax returns to include franchise and income taxes plus penalties and interests for late payment.
Ohio HOAs that are made up of residential property have their income from members assessments generally exempted from federal income tax. Membership income comes from the members in exchange for services like preservation, maintenance, or management of the association.
This income is generated from association dues and assessments, fines and fees, late fees and interest on late assessment payments, resident clubhouse or other facilities in the community.
Ohio Filing Options
Both Condo and Homeowners Associations have two options to file their tax returns; they can file using Form 1120 which is the tradition route to take. Form 1120 is flexible with the expense allocation because it does not require HOAs to maintain the 90% rule, and has lower tax rate (15%) for the first $50,000 of the taxable income. This is sometimes complication for most HOAs to file because it requires a level of accounting and bookkeeping that most HOAs do not maintain. It also subjects all of the HOA’s income to be taxed, funds set aside or in excess of expenses will be taxed.
HOAs and COAs can elect to use the second options and be taxed under section 528 of the IRC, and file a Form 1120-H instead of Form 1120. To qualify for this treatment, condo associations 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. Any profit is not allowed to benefit members.
Filing Form 1120-H means most of the HOA’s income will not be taxable, which is favorable. Taxable income is generated as a result of bank interest, dividends, guest fees, such as golf-course usage, renting community facilities, payment for easements, like cell towers but the association is allowed to carry forward the excess to offset future payments. Expenses incurred only to generate the taxable are then deducted with support from records.
Once an association has filed a Form 1120-H, revoking it will be impossible unless the IRS was to consent to doing so. The HOA would have to request IRA consent by filing a ruling request; a fee is applicable for every ruling request applied.
If the HOA fails to meet the Form 1120-H filing due date, they will receive an automatic 12 month extension to make an election, after that they can lose the chance to file under this option and be forced to file a Form 1120 and incur the penalties of paying late. Homeowner associations or condo associations have the freedom to compare the total tax payable by Form 1120 with that payable by Form 1120-H and file the form with the lower tax liability.
The exemption privilege and the option to carry forward extra income do not eliminate the requirement for Ohio HOAs and COAs from filing tax returns. If an association is to fail filing a return, they will face penalties and interests and preparation fees for the unfiled returns possibly being suspended under they comply.