Question: Do Nebraska HOAs and COAs have to file tax returns?
Answer: All Nebraska homeowners and condominium associations are classified under Common Interest Realty Associations and are required to file federal and state tax returns whether incorporated or not. Good news is that even though a tax return is a requirement, it does not mean your COA owes the state any tax.
One very rare case to avoid filing is to apply to be a Non-Profit entity under section 501(a) (4), Form 990. However, it requires a lot of investing in research, paperwork and time trying to persuade IRS. 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.
Options for HOAs and COAs
1. Form 1120
Nebraska HOAs and COAs have two options to file their tax returns; they could file using 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 and COAs.
First, all association’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 associations do not keep. Associations are also required to make an estimate of their payable tax which is a hard task to accomplish.
2. Form 1120–H
Most associations elect to use the second option, to be taxed under section 528 of the IRC, and to file Form 1120–H instead of Form 1120. To qualify for this treatment, COAs 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. Income cannot be used to benefit association members.
Filing Form 1120–H means most of the HOA’s income falls under exempt function income, and are not taxable. Income is tax exempt if generated from:
- Association dues and assessments;
- Fines and fees from Architectural Control Committees;
- Late fees and interests on late assessment payments;and
- Resident clubhouse and other facility rentals.
Taxable association income is generated from:
- Interest from banks and dividends;
- Guest fees, such as golf-course usage;
- Renting facilities like clubhouse;
- Payment for easements, like cell towers.
Deductible expenses are then taken against the income. A $100 deduction is allowed on taxable income, and a flat rate of 30% applied.
Electing to File Form 1120-H
Nebraska homeowner and condo association elects to take advantage provided under section 528 by filing Form 1120–H annually, before its due date, including extensions. Once an association has filed Form 1120–H, revoking it will be impossible unless IRS consents to it. HOA will have to request IRS consent by filing a ruling request; a fee is applicable for every ruling request applied.
If an HOA fails to file Form 1120–H by its due date, they get an automatic 12 months extension to make an election, after that they may lose the chance to file Form 1120 – H that year being forced to file Form 1120 and incur penalties on late tax payment. Homeowner associations or condo associations have the liberty to compare total tax payable by Form 1120 with that payable by Form 1120 – H and file the form with a lower tax. This form is difference from a form for a retirement plan.
Make sure that you discuss your tax situation with a qualified HOA CPA. They will make sure that your filing is prepared accurately and timely.