Homeowners’ Association Tax Forms
Posted on Wednesday, October 22, 2014
Homeowners’ associations are unique in that there are three different tax forms that one could file, depending on its circumstances.
These associations are normally taxed as corporations either under IRC Section 277, which applies to certain membership organizations (file Form 1120, U.S. Corporate Corporation Income Tax Return) or under IRC Section 528, which applies specifically to homeowners’ associations (file Form 1120-H, U.S. Income Tax Return for Homeowners Associations). A few homeowners’ associations may qualify as tax-exempt under Section 501(c)(4) or 501(c)(7) and file Form 990, Return of Organization Exempt From Income Tax. All homeowners’ associations must file a tax return, no matter what section of the code they fall under, even if they have no taxable income.
Under IRC Section 277, a homeowners’ association must allocate its income and expenses between membership and nonmembership activities. Only its net nonmembership income is taxed at regular corporate tax rates. Under IRS Section 528, income and expenses must be allocated between exempt function and nonexempt (income producing) function activities. Only its net nonexempt function income is taxed at the rate of 30%. Those associations that qualify under IRC Section 528 can choose to file either Form 1120 or 1120-H on a year by year basis. Normally Form 1120 will result in a lower tax rate than Form 1120-H; however, you should contact your accountant to determine which form is the best decision for your association. Tax-exempt associations that file Form 990 only pay tax on unrelated business income by filing Form 990-T, Exempt Organization Business Income Tax Return.
Homeowners’ associations may qualify for tax-exempt status under Section 501(c)(4) as a social welfare organization or under Section 501(c)(7) as a recreational organization; however, there are very few associations that meet the requirements because they primarily serve only their members and not the community. To qualify for exemption under Section 501(c)(4) an association must meet the following requirements:
- It must serve a community that bears a reasonably recognizable relationship to an area normally identified as a governmental unit.
- It must not conduct activities directed to the exterior maintenance of any private residents (i.e. cannot perform exterior maintenance on private residences).
- Common areas of the association must be for the use and enjoyment of the general public.
There has been little explanation on the specific definition of “community”; however, the IRS has routinely taken the position that a “gated community” denies access to the public and therefore does not serve the community.
Section 501(c)(7) applies to social and recreational organizations. The association’s net membership income is not subject to taxation but any interest income is. In order to qualify for exemption under Section 501(c)(7) an association must meet the following requirements:
- Be a club;
- Be organized for pleasure, recreation, and other nonprofit purposes;
- Have substantially all of its activities devoted to such purposes;
- Have no part of its net earnings inure to the benefit of any private shareholder; and
- Have no written policy that discriminates against individuals seeking membership on the basis of race, color, or religion.
In order to apply for tax-exempt status under either Section 501(c)(4) or (7), the association needs to file Form 1024, Application for Recognition of Exemption under 501(a) with the IRS.
Contact your accountant to determine which form is best for your association based on your unique circumstances.
Posted by: Carrie Minnich, CPA
Posted in Mission Minded Nonprofits
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