Living in a residential development that is planned according to community standards and provide social amenities like parks, clubhouses for everyone residing within the community means you are part of a homeowner or a condo association. Residents contribute funds towards maintaining these common areas through dues and assessments.
In recent years, issues have arisen over the management of HOAs and condo associations. One issue that many associations grapple with is filing federal and state tax returns. Many HOAs (especially those that are self-managed) do not know about the filing requirements. Often they just don’t file at all. Your association will most likely have two filing options – Form 1120 or Form 1120–H.
South Carolina HOAs have Filing Options
First, it is mandatory to file tax returns. South Carolina HOA and condo associations will have a corporate charter at the state level. Associations are generally not “for-profit” entities. They exist to serve the association members. But they are not technically charitable organizations either.
Option 1: Form 1120. This is the traditional corporate method which was the only available form before the Tax Reform Act of 1976. This form is a little more complex for HOAs to file. They will subject all association income (net of expenses) to taxation.
Option 2: Form 1120-H. This form is filed under IRC Section 528 and it specifically is designated for HOAs. It is a simple and straight forward return. However, condo associations and HOAs must meet the following criteria to qualify for Form 1120–H:
- At least 60% of association revenue is from members and is not related to the selling of services;
- At least 90% of expenditures relate to normal operations, management property maintenance;
- At least 85% of units are used as residential residences;
- Income is not accrued to the benefit association members or related parties.
Exempt-Function Income: Section 528 provides that dues and fees from association assessments under it’s normal course of operations is treated as exempt-function income. Accordingly, this income is not subject to taxation.
Non-Exempt-Function Income: But there is some association income that is subject to taxation. This is income that is ancillary to the association’s daily activities. This could include bank interest and dividends, golf course green fees, clubhouse rentals, etc.
Taxation: Since the IRS will not subject an association to taxation on net exempt income, only non-exempt income will result in a tax liability. A $100 standard deduction is then applied to taxable income. This includes section 105.
Electing to File Form 1120-H
South Carolina HOAs and condo associations must make an annual election to file Form 1120–H. They would make it by filing a timely tax return (including extensions). If an association fails to make the timely election, they may forfeit their opportunity to file under form 1120-H, which would require them to file Form 1120.