You may not owe, but you still need to file!
Especially with self-managed communities, there seems to be a lot of confusion and questions about community association taxes and tax returns. The bottom line is that community associations need to file federal tax returns, and most are now due on April 15 each year. The majority of associations should also pay little to no taxes.
Understanding exempt and taxable income
Community associations are considered corporations by the IRS and most states. Obligations to organize as a nonprofit or for-profit entity are determined by state statutes (like in Florida) as well as the association. Like all corporations, associations need to file tax returns. The difference is that qualifying associations can elect to file under Section 528 of the Internal Revenue Code, which exempts several types of revenue from association tax obligations, including:
- Membership dues and assessments
- Late fees and interest on those dues and assessments
- Facility rental fees, like resident clubhouse rentals
Unfortunately, some income may still be taxable, including:
- Interest and dividends from banks or investments
- Rental income paid by non-residents, such as use of the clubhouse, boat dock rental, or RV storage space
- Money received for “right-of-way” deals, like cable access agreements and cell tower leases
Even here, your association may be able to offset this income with supporting expenses such as legal fees to create contracts, common area maintenance, etc.
Special tax form available for community associations
Corporations typically file tax return Form 1120 each year. Form 1120 is fairly complex, but fortunately there’s a one-page alternative specifically designed for HOAs and condo associations—Form 1120-H. Cooperative associations have their own tax form – Form 1120-C. Contact an experienced CPA to determine if your association qualifies, and whether a state return is also required. Don’t delay! Tax returns are typically due April 15, or the 15th day of the 4th month after the end of the tax year.
Don’t mess with the IRS! Contact an experienced CPA
You don’t want to be remembered as the board member who caused an IRS audit. File annual tax returns, and make this an agenda item at the first board meeting of every year. Penalties for late or missing tax return filings can be harsh, including loss of your association’s exempt income status. If your association hasn’t filed in recent years, now is the time to catch up and file for as many years back as you have reasonable financial records. A CPA can help get you caught up, and may be able to get late filing penalties waived or reduced.