Understanding tax laws relating to Pennsylvania HOAs and condo associations may sound complex. But if you understand some of the basic rules you can stay out of trouble.
IRC §528 governs whether or not an association qualifies to file the simpler tax return (Form 1120-H). The majority of HOAs will be able to comply with the spirit of the code. If the association does not elect the to file under IRC §528, it is taxed just like any other corporation or for profit entity.
Historically speaking, many HOAs didn’t elect IRC §528 status. But they coordinated and timed association income and expenses so that they never had any “net income” for a given tax year. But if not correctly timed, they could be faced with taxable income and a large tax bill that could have otherwise been avoided.
HOA & Condo Association Reserves
Many HOAs desire revenue in excess of expenses so that they can build a reserve. HOAs that find themselves taxed as corporations are taxed on any excess of revenue over expenses (“net profit”).
But in contrast, IRC §528 HOAs may accumulate reserves without incurring a tax liability as long as they meet the criteria. But there complications in the planning process. Certain HOAs that otherwise qualify under IRC §528 may find they have taxable income as a result of non-exempt function income. This could include income from laundry facilities, clubhouse rentals, vending machine income, etc.
But if IRC §528 HOAs or condo associations have net taxable income, the income would be taxed at a rate of 30% as opposed to the 21% rate afforded normal corporations. Accordingly, some associations with sizable nonexempt function income may prefer to be taxed as an ordinary corporation. This will also allow them to carry forward net operating losses in down years.
Does an HOA or condo association need to file a corporate tax return in Pennsylvania?
Even though they are not technically “non-profits”, Pennsylvania exempts certain organizations from taxation. Prior to 1998, non-profit corporations (including homeowners associations) were required to file PA corporate returns (RCT-101) as long as they had the capacity to issue capital stock.
But in 1998 that all changed. PA exposed all non-profit entities to the capital stock and franchise tax and corporate net income tax unless the entity was specifically exempted by state statute. In order to meet the exemption, the entity must meet just one of the following criteria:
- It is an exempt organization according to section 501 of the tax code.
- It is a qualified not-for-profit entity under state law and meets one of the following: (a) would qualify as an exempt organization under section 501; (b) it qualifies as a homeowners association as defined by section 528(c) of the tax code; it is a membership organization subject to section 277 of the tax code so long as no profits or gains accrue to any related party or member of the organization; or (d) it is what is called a “non-stock commodity” or a non-stock stock exchange entity.
Filing a Pennsylvania HOA or Condo Association Tax Return
At the end of the day, make sure that you do your own due diligence and make the best decision for your association. In consultation with an experienced CPA you can make sure that you limit your tax liability.