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:
- 60% of revenue is gained from members and not the sale of goods and services.
- 90% of its expenditure is on operations and maintenance of the property.
- 85% of units should mostly be used as residences.
- 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%.