A homeowners association is a taxable entity and must file an annual tax return with the IRS. Even though a return is required, much of the income is often exempt from taxation. Officers of homeowners associations may file an income tax form specifically intended for homeowners associations.
Form 1120-H is used to report revenue received from homeowner assessments, along with other potential sources of income. The form also reports association expenses. For some associations, there is little or no net profit from membership fees. Even if the core function of a homeowners association shows no profit, other activities may produce taxable income.
The primary advantage of filing Form 1120-H is that the core activities of your homeowners association become exempt from tax. Exempt income includes homeowner assessments. In order to qualify to file 1120-H, both income and expenses of a homeowners association must be within specified limitations.
Homeowner assessments must comprise at least 60 percent of total revenue. To be considered an assessment, income received from association members must be due to their property ownership. Income received from customers to rent property does not qualify as exempt.
Other potential sources of nonexempt revenue include the following:
- Laundry services
- Vending machine income
- Recreation fees charged to nonmembers
At least 90 percent of total expenses must be to acquire, build, or care for association property. Qualifying costs include property maintenance, security, and office expenses. Remaining expenses related to nonexempt sources of income may be used to offset nonexempt revenue on Form 1120-H.
Much of Form 1120-H is used to report various categories of nonexempt income and the expenses related to nonexempt income. Form 1120-H also requires entries for exempt revenue and expenses related to exempt revenue. The two exemption entries are necessary to ensure that they are in correct proportion to overall income and expenses.
A somewhat unusual aspect of Form 1120-H is that it is designed to automatically add $100 as an expense deduction. Nonexempt revenue is reduced by related expenses, along with the $100 deduction, to arrive at net taxable income.
If your homeowners association does not qualify to file Form 1120-H, another income tax form must be used. If a different form is used, such as Form 1120, the exempt definitions and ratio requirements of Form 1120-H are no longer applicable.
If eligible, the election to file Form 1120-H is available each year. Contact an accountant like HBE Becker Meyer Love LLP for more information on the tax filing requirements of homeowners associations.