From July 3, 2008, when the U.S. Government signed into law an Act Relative to Tax Fairness and Business Competitiveness, Massachusetts condo and homeowners associations have not quite understood what is required of them when it comes to filing their taxes. Business entities which included condominiums were previously classified differently for federal tax purposes, the Act eliminated these classifications.
The changes to Massachusetts tax policy means that from January 1. 2009, condominiums and homeowners in Massachusetts should ensure that they file their taxes. I will try to clear some few aspects that may assist you to file that tax as a Massachusetts member of a homeowner association.
Massachusetts Condo Association & HOA Tax Returns
Massachusetts HOAs and condo associations must file Articles of Incorporation with the Secretary of State, and therefore, are considered corporations and must file taxes just like any other corporations across the country. Most HOAs are created as non-profit corporations but are still taken as a normal corporation for taxation purposes.
There are rare cases where HOA’s application to be recognized as non-profit by IRS, but are expensive and quite difficult to obtain, and are requested through filing Form 1024 with the IRS while maintaining section 501(c)(4).
Two Options for Massachusetts HOA Tax Returns
Massachusetts homeowner associations have two options when filing tax returns; one is to file as a normal corporation, also considered traditional corporate method, using Form 1120. This option is generally disadvantageous to HOAs. By filing Form 1120, HOA put all its income to be taxable; any funds set aside or in excess of expenditure will be taxed.
Form 1120 has also proven to be complex, requiring some level of accounting and bookkeeping that most HOAs do not keep. They are also required to make an estimate of their payable tax, and as pointed out that they lack a level of bookkeeping, will be a hard task to accomplish.
To avoid all these, Massachusetts HOAs have the privilege to avoid Form 1120. Section 528 gives Homeowner Associations option to fill Form 1120–H if they accomplish certain requirements. Form 1120–H is designed specifically for HOAs and is much easier to understand, just one page.
Many HOA CPAs consider it to be the simplest form to file. The requirements are:
- 60% of HOA’s annual revenue must fall under exempt-function income, meaning that they are generated from owners who are members and not as customers.
- HOAs should also ensure that 90% of its expenditures are on capital expenditures (generating depreciation), maintenance, and management expenses.
- The units within the community should mostly be used as residences, more than 85%.
- Annual residual income must not be used to benefit association members.
If a Massachusetts homeowner association qualifies to file Form 1120–H, then they will only be taxed on the non-exempt income. The non-exempt income is generated through interests from banks and other reserves, and other for-profit activities, such as renting out a clubhouse, the vending/laundry machine income or golf-course fees.
Expenses used solely to generate the non-exempt income are then deducted; records to support these expenses should be available. Homeowners associations are allowed a $100 deduction on taxable income and a flat rate of 30% is applied.
Massachusetts HOA Tax Return Filing Requirements
Massachusetts homeowner association elects to file Form 1120–H annually, before its due date, which is the 15th day of the third month after a tax year; to revoke an election requires the consent of IRS. However, if HOA fails to file Form 1120–H within one year of its due date, they 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.
By filing Form 1120–H, most associations find themselves filing very minimal taxes. The tax burden is reduced, but they must be filed.
Seek further guidance from the Massachusetts Department of Revenue to get a better understanding of your HOA tax liability. Tax issues for your homeowner association can be a lot easier if you make that extra effort to plan, seek help, and have a little more knowledge on your tax filing status.