Filing Tax Form 1120-H for a Homeowners Association
Navigate the specific tax rules for HOAs with Form 1120-H. This simplified election separates member dues from taxable income for a clear reporting process.
Form 1120-H, U.S. Income Tax Return for Homeowners Associations, is a tax document for qualifying homeowners associations (HOAs), condominium management associations, and residential real estate management associations. Filing this form allows an association to use the tax benefits of Internal Revenue Code Section 528. These benefits permit the organization to separate its income into two categories, excluding income from its exempt functions from taxation. The choice to file Form 1120-H is made annually; if not used, an association must file Form 1120 and pay the 21% corporate tax rate on its net taxable income.
While most associations file either Form 1120-H or Form 1120, other options exist. An association can apply for tax-exempt status as a social welfare organization or a social club, but qualifying is difficult. A social welfare organization must benefit the general public, while a social club’s primary purpose must be recreational, so most associations do not pursue these statuses.
Eligibility Requirements to File
To qualify for filing Form 1120-H, an association must satisfy several specific tests. The first is the 60% gross income test, which requires at least 60% of the association’s total gross income for the tax year to come from exempt function income. This income includes membership dues, fees, and assessments collected from property owners in their capacity as owners, not as customers for specific services.
Another requirement is the 90% expenditure test. This rule requires that at least 90% of an association’s spending be for its exempt function purpose. These expenditures are costs for the acquisition, construction, management, maintenance, and care of the association’s property, such as landscaping, snow removal, and repairs to common areas.
An association must also meet an organizational and operational test. This means the organization must be formally structured and run for the primary purpose of managing and maintaining the association’s property. Its governing documents and activities must reflect this objective, and it cannot be organized for the private benefit of any individual.
Finally, the association must serve a substantially residential purpose, which is met if at least 85% of the total square footage of all units or lots is used by individuals for residential purposes. If an association fails to meet any of these four requirements, it is not eligible to file Form 1120-H for that tax year.
Information and Calculations for Form 1120-H
Properly completing Form 1120-H requires careful separation of an association’s financial activities. The first step is to distinguish between exempt function income and nonexempt function income. Nonexempt function income is everything else, such as interest earned on bank accounts, revenue from renting out a clubhouse to non-members, or income from laundry or vending machines.
Next, all expenses must be categorized between those related to the association’s exempt functions and those directly connected to generating nonexempt income. For example, the cost of general landscaping is an exempt function expense, but cleaning a hall rented for a fee would be an expense deducted from that rental income. Some costs, like management fees, may need to be allocated between the two categories.
The calculation of taxable income begins with the total gross nonexempt function income. From this amount, the association subtracts the ordinary and necessary expenses paid to produce that income. After deducting these expenses, the IRS allows for a specific $100 deduction, and the remaining amount is the association’s taxable income.
Once taxable income is determined, the tax is calculated using a flat rate of 30% for homeowners associations. For example, if an association has $5,000 in taxable income, its tax liability would be $1,500 ($5,000 x 0.30). Timeshare associations that file Form 1120-H are subject to a slightly higher rate of 32%.
The Filing Process
The decision to use the tax benefits of Section 528 is made annually by filing a properly completed Form 1120-H by the deadline. Should an association later determine that filing Form 1120 would have resulted in a lower tax, it can file an amended return on that form.
The filing deadline is the 15th day of the 4th month after the end of the association’s tax year, which is April 15 for a calendar year. An exception exists for an association with a fiscal year ending on June 30; its return is due by the 15th day of the 3rd month after its year-end. If more time is needed, an association can request an automatic six-month extension by filing Form 7004.
An extension provides more time to file but not more time to pay any tax owed. Completed returns can be submitted through mail or filed electronically, which is the recommended method. The mailing addresses are listed in the official IRS instructions for the form.
Any tax liability must be paid by the original due date of the return. Payments can be made through the Electronic Federal Tax Payment System (EFTPS) or by mailing a check with the return. Failure to pay on time can result in interest charges and penalties.