Many Minnesotans live in homes and condos that are ruled by homeowners associations, condo associations or community associations. These associations set rules and regulations to be followed and collect dues and assessments to be used to manage the shared properties within the community.
Homeowner associations and condo associations often act like non-profit corporations. Federal law requires that all corporations must file annual tax returns. HOAs and condo associations are therefore required to file tax returns, but they generally have no tax to file.
Their income is used to ensure the property is well maintained and therefore have no excess income. Minnesota Common Ownership Interest Act ensures that all associations do not violate State and Federal statutes.
We will take you through the 4 step processing for filing Minnesota HOA or condo association tax returns.
1. Determine your Form 1120–H qualification
Form 1120–H, filed under Section 528 of the IRC, is specifically created for homeowners associations. It is way easier and simple to file, just one page. However, condo associations and HOAs must meet the following criteria to qualify for Form 1120–H:
- 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.
2. Classify your income and expenses
- Association dues and assessments
- Fines and fees from the management company
- Late fees and interests on late assessment payments
- Resident clubhouse and other facility rentals.
Incomes subjected to taxation are the ones generated out of the scope of daily activities of the association. They are considered income from outside, and may include;
- Interest from banks and dividends
- Guest fees, such as golf-course usage, renting facilities like a clubhouse
- Payment for easements, like cell towers.
To arrive at the net taxable amount, you deduct total expenses incurred solely to generate this taxable income, with support from records availed. A $100 deduction is allowed on taxable income, and a flat rate of 30% applied.
3. Elect Form 1120 – H
Your Minnesota homeowner association should elect to file Form 1120–H annually. The form must be filed before its due date, including extensions. If HOA fails to file Form 1120–H by its due date, they get an automatic 12 months extension to make an election.
Once your association has filed Form 1120–H, you cannot revoke it unless IRS consents to it. Your association will have to request IRS consent by filing a ruling request; a fee is applicable for every ruling request applied.
4. File the Minnesota HOA or condo association tax return
Form 1120 is more complex for homeowner associations to file and subjects all income to taxation, but is considered to be more flexible because it does not impose the 90% expense rule and has a lower interest rate of 15% for the first $50,000 taxable income.
If you fail to elect Form 1120–H by the given dates, 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. Your associations, however, have the liberty to compare total tax payable by Form 1120 and with that payable by Form 1120-H and file the form favorable to you.