Yalnes, Inc. Blog

The Tax Season for Associations

No matter what type of “business entity” (Condominium, Homeowner, Planned Unit Development, Co-Op, incorporated or not) your Association is, a tax return must be filed with IRS (some States also require Associations to file State income tax returns in addition to Federal taxes). While most Associations are “non-profit” under State corporate statutes, they must file a Federal income tax return. There are very few Associations, which Internal Revenue Service classifies as non-profit.

There are a couple of ways an Association can file its tax return – as a regular corporation (Form 1120) or as a Homeowner Association (Form 1120H). There are some benefits and restrictions with each. For example, an Association must file as a regular corporation if it is not “substantially residential”. Substantially residential usually means that at least 85% of the Association must be Residential (so, if there is a total of 20 Units in the Association and 5 of them are Commercial, your Association may not qualify to file as a Homeowners Association).

While Form 1120H has a higher tax rate (30% for Residential Associations and 32% for Timeshare Associations), most Association revenue is exempt from taxes (i.e. member assessments). Taxable items include, but aren’t limited to, interest on reserves, rental income, and “use fees” (i.e. clubhouse, Guest Suite, etc.).

There may be benefits in electing to file Form 1120. The tax rate is lower (15% for the first $50,000); however, the IRS will see the Association as a regular business/corporation. This means the tax exemption (member assessments) available with Form 1120-H no longer applies. Total taxable income is offset by total allowable expenses and you pay taxes on what’s left. So, if in a given year, your Association’s operating expenses greatly exceeded income and you had substantial interest on reserve funds (which would be taxable under 1120-H), filing as a regular corporation may reduce your tax bill.

Most CPAs familiar with Community Associations will look at your particular situation and recommend which form to file. However, you should double check with your Association’s CPA to make sure they do so as a normal course of business.

February 17, 2009 Posted by Dimitri Shein, CPA | Accounting, Taxes | Accounting, Taxes | Leave a comment