Filing Instructions for the 1120 H Tax Form

Form 1120-H, the U.S. Income Tax Return for Homeowners Associations, is a tax form filed by qualifying associations to elect for special tax treatment under Internal Revenue Code Section 528. This election allows an association to separate its income into exempt and non-exempt function categories. By making this choice, the association can exclude its exempt function income, which constitutes the majority of its revenue, from its taxable gross income. This can result in a more favorable tax outcome than filing as a standard corporation.

Eligibility Requirements for Filing

To qualify for filing Form 1120-H, a homeowners association (HOA) must satisfy a series of tests. The first is an organizational and operational test, which mandates that the association must be organized and run for the purpose of acquiring, building, managing, and maintaining “association property.” Association property refers to real or personal property owned by the organization or commonly owned by its members for the collective use and enjoyment of the residents.

The 60% gross income test requires that at least 60% of the association’s total gross income for the tax year must come from exempt-function income. Exempt-function income is revenue generated from membership dues, fees, or assessments paid by the property owners who are members of the association. This test ensures that the association’s primary financial support comes from its members.

The 90% expenditure test requires that at least 90% of the association’s total expenditures for the tax year are for the acquisition, construction, management, maintenance, and care of its property. These are known as exempt-function expenses. Adherence to this test demonstrates that the organization’s funds are overwhelmingly used for the benefit of its members and the upkeep of community property.

The 85% unit test requires that at least 85% of the total square footage of all units within the association must be used by individuals for residential purposes. This test solidifies the residential nature of the association, distinguishing it from commercial property management organizations. An association must meet all of these requirements to be eligible to file Form 1120-H.

Information and Calculations for Form 1120-H

Before completing Form 1120-H, an association must gather specific financial information. The association will need its Employer Identification Number (EIN), official name, and address. It is also necessary to compile financial records detailing all sources of income and all expenditures for the tax year.

A clear distinction must be made between exempt function income and nonexempt function income. Nonexempt function income is revenue derived from other sources, such as interest earned on the association’s bank accounts, dividends, fees from non-members for facility use, or income from vending machines. Properly categorizing each income stream is a foundational step in the form’s preparation.

With the financial data organized, the association can proceed to fill out the form. The process involves reporting total income and then subtracting the exempt function income to determine the total nonexempt function income. From this amount, the association can deduct expenses directly related to generating that nonexempt income. After subtracting these allowable expenses, the law permits a specific deduction of $100 to further reduce the taxable amount.

The final taxable income is subject to a flat tax rate. For condominium management and residential real estate management associations, this rate is 30%. For timeshare associations, the rate is 32%. This flat tax applies to the net nonexempt function income, regardless of whether it is ordinary income or capital gains.

The Election and Filing Procedure

The act of filing a completed Form 1120-H serves as the official election for that specific tax year. This election is not permanent and must be made annually by filing the form for each tax year the association wishes to use this tax treatment. If the form is not filed, the association will be taxed as a regular corporation on Form 1120.

The deadline for submitting Form 1120-H is the 15th day of the 4th month following the end of the association’s tax year. For an association using a standard calendar year ending December 31, the due date is April 15. Should the association need more time, it can file Form 7004, Application for Automatic Extension of Time To File, to receive an automatic extension.

Associations have multiple options for submitting the completed form. It can be mailed to the IRS service center specified in the form’s instructions. Alternatively, the form can be filed electronically using IRS-approved tax software or through a tax professional. Associations that file 10 or more returns of any kind during a calendar year are required to e-file.

If the completed form shows a tax liability, the payment must be made by the original filing deadline. Payment can be submitted through various methods, including IRS Direct Pay, debit or credit card payments through an approved processor, or by mailing a check or money order with the tax return.