The Real Estate Development Act and Unit Ownership Estate Act govern homeowners and condo associations in Oklahoma. HOA or COA constitutes single homes, townhomes, or condo managed in a common interest community in Oklahoma and residents are responsible to pay dues and assessments to their respective associations to help manage and maintain these community areas.
Oklahoma corporations pay a flat rate of 6% on their taxable income. Just like the federal corporate tax, they are allowed to deduct expenses and credits incurred to generate the taxable income. Income considered to be taxable is determined on a three-factor formula that is Oklahoma’s share of the total corporation’s total payroll, property, and sales.
Homeowner and condo associations are registered as non-profit corporations and therefore are subjected to both Oklahoma corporation income tax and the federal income tax.
How to File Oklahoma HOA and Condo Association Tax Returns
Form 1120 and Form 1120 – H are available for Oklahoma homeowner or condo associations to file their returns. Form 1120 is a more complex form and subjects all income to taxation. However, it is sometimes considered more flexible as it does not impose all the limitations under code section 528.
Form 1120 – H, filed under Section 528 of the IRC, is specifically created for homeowners associations and has more benefits to the association as compared to Form 1120.
It can be substantially easier to file, just one page and allows an association to exclude exempt-function income from its income. We will, therefore, concentrate on this form and its requirements because 90% of homeowners and condo associations file this form.
Form 1120 – H requirements
1. Qualification Criteria
COAs and HOAs must meet the following criteria to qualify for Form 1120 – H:
• At least 60% of gross revenue is from members and not the sale of goods and services.
• No less than 90% of the entitiy’s expenditures relates to maintenance and operations of the property.
• At least 85% of property units should be residential residences.
• Any resulting income is not to be used for the benefit of association members.
2. Exempt-Function Income
The IRS states that association fees and and assessments, any association fines or late fees on assessments be treated as exempt-function income for tax purposes. Accordingly, this income will not result in a tax liability to the association.
3. Non-Exempt-Function Income
Income that can be subject to taxation are ones that result from activities outside the scope of the association. They may include: bank interest and dividends, guest fees, golf-course fees, facility rental like clubhouse, and payment for easements, like cell towers.
To calculate the net tax liability, deduct expenditures relating to taxable income. A $100 standard deduction is then allowed and a flat rate of 30% applied.
5. Electing to File Form 1120-H
Oklahoma homeowner and condo associations can elect to file Form 1120 on an annual basis. However, they are required to file by the due date, including extensions. If an HOA fails to file Form 1120–H by the due date, they get an automatic 12 months extension to make an election. Subsequently, they may lose the opportunity to file Form 1120–H for that given year and be forced to file Form 1120.
Form 1120-H simplifies the filing process for many Oklahoma HOAs and COAs. As long as the association meets the above criteria, there is minimal tax risk. Tax-exempt-function income is also excluded from taxable income.
Form 1120 is not designed for homeowner associations, but some associations sometimes consider filing it. Form 1120 lure associations by its low tax rate of 15%for the first $50,000 as compared to 30% for Form 1120–H. They, however, have the liberty to compare and file the form with lower tax.