Owning a home, condominium, or a townhome in a gated community in Wisconsin, you probably are part of a homeowner association (HOA) a condominium association. You have an obligation to follow agreements like restrictions, conditions and covenants put in place and also contribute dues and assessments to be used to maintain the shared areas like pools and roads.
Your HOA or condo association has to comply with federal and state tax requirements. Associations file Articles of Incorporation with the state of Wisconsin and are therefore technically treated as corporations. But they still must file annual tax returns.
Wisconsin HOA Tax Filing Requirements
Filing returns can be done using either Form 1120 or 1120–H. All corporations were generally required to file Form 1120 before the Tax Reform Act of 1976. All HOAs were treated as “for-profit” corporations. Form 1120 was disadvantageous to most HOAs. All HOA income is subjected to tax and requires a higher level of accounting due to its complexity.
Tax Reform Act of 1976 created Section 528 of the Internal Revenue Code (IRC), creating Form 1120–H. It is specifically designed for HOA and condo associations and is much easier to complete even by self-managed associations. Let’s concentrate on Form 1120 – H because it is preferred by most HOAs and condo associations.
Qualifying for Form 1120–H
Although most associations qualify to file Form 1120–H, certain requirements have to be met. We shall look at these requirements to determine if your association qualifies to file Form 1120–H.
- HOA or association must be organized and operated to acquire, build, manage, maintain, and care for association property, condominium project or a subdivision where 85% of all the association’s units, lots or buildings are used by individuals as a residence.
- 60% or more of the association’s annual gross income must be exempt function income. This is income from membership dues, fees or assessments.
- 90% or more of the association’s expenditure for a tax year must be exempt function expense, that is, it should be used to acquire, construct, manage, maintain and care for association’s property.
- Earnings and resources of an association should not be used to disproportionately benefit any person or group of persons having a personal or private interest in the function of an association.
Classifying Exempt and Non-Exempt Income
• Association dues and assessments
• Fines and fees from the late payments or association violations
Income and revenues subject to tax are generated from activities performed outside the normal scope of association activities. They will often include the following:
• Interest from banks, dividends and capital gains
• Guest rental and usage fees for the golf course and clubhouse
• Income received from easements, such as cell phone towers.
To determine net taxable income, the association deducts expenses incurred to support taxable income.
Electing to File Form 1120–H
Election to apply IRC Section 528 for that tax year – HOA or condo association makes an election every year by timely filing form 1120–H. The form must be filed by its due date, the 15th day of the fourth month following the end of the association’s tax year.
Extension to file Form 1120–H can be made by filing Form 7004 with the IRS by the due date of the tax return, associations can be granted an additional six months to file Form 1120–H. If an association fails to file Form 1120 – H by its due date, they will be forced to file Form 1120 that year, and also pay penalties for late submission.
Form 1120 – H simplifies tax filing for most Wisconsin HOAs and condo associations. It is a safe form for associations to file as it has limited tax risk if the association meets the above requirements. Tax-exempt function income is also excluded from taxable income. Form 1120 is not designed for homeowner associations, but some associations consider filing it.