Most Michigan homeowner associations and condo associations are classified as non-profit corporations pursuant to the Non-profit Corporations Act, MCL 450.2101, et. seq. Non-profit corporations are considered as corporations for federal and state tax purposes and must file tax returns just like any other corporation across the states.
The returns are due by 15th of April each year if an association follows calendar year accounting method, of which most do. An automatic extension can be applied for by filing IRS Form 7004 called the Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns.
An association gets a six-month extension to file the appropriate tax return, but will have to incur interest on any tax not paid by the regular due date of the return.
Michigan HOAs & Condo Associations Have Filing Options
Michigan HOAs and condo associations collect funds to help operate, manage and maintain the association’s common areas. Even if an association does not owe the state and federal government any money, it has an obligation to file annual tax returns. There are three forms to be utilized when filing income taxes:
- Federal Form 1120–H
- Federal Form 1120
- Federal Form 990
Section 528 of the IRC allows associations to file Form 1120-H, which is the standard form for homeowner and condo associations. They, however, have to meet the following criteria:
- 60% of HOA’s annual revenue must fall under the definition of exempt-function income (meaning 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, maintenance, and association 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.
The greatest source of revenue to an association on an annual basis typically comes from membership dues, fees or assessments. So long as the payments come from the owners as owners and not as customers, membership dues, fees or assessments are exempt from income.
Taxable income can be generated from interest from banks and dividends, guest fees, such as golf-course usage, renting facilities like clubhouse, and payment for easements, like cell towers. A flat rate of 30% is applied on net taxable income for associations and 32% for timeshare associations.
Federal Form 1120
Under Section 277 of the IRC, some associations prefer to file 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.
First, all HOA’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 HOAs do not keep and third, HOAs 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.
Federal Form 990
Non-Profit associations under Section 501(c)(4) file Form 990. However, it requires a lot of investing in research, paperwork, and time. 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.
If by any chance IRS accepts your application, you will be privileged to use your funds to improve your community, and general maintenance, for the good of the general public of course. Homeowner association could even receive state funds to help maintain these areas.
Members and management of an association should check to ensure that their association does not go on the wrong side of the IRS by filing relevant tax returns on time. An association should seek the help of a knowledgeable CPA or tax professional to review and decide on the best federal form an association should file.