Tax Issues Facing Homeowners' Associations: Forms 1120-H, 1120, 1120-C, and 990

Description

For most HOAs, there are three possible ways to file:

• Tax-exempt under IRC Section 501(c), (Form 990)
• As a regular corporation under IRC subchapter C (Form 1120), or
• Quasi tax-exempt under IRC Section 528 (Form 1120-H).

A smaller number of associations qualify as Subchapter T cooperatives with their own unique set of tax issues. These cooperatives file Form 1120-C.

Instead of filing the same way as last year, professionals need to consider or reconsider these alternatives each year. And, don't exclude Form 1120-C from consideration--some tax preparers are taking the position that condominium associations actually qualify as cooperatives and should file Form 1120-C.

All filing choices are fraught with their own unique tax aspects opening up areas of potential disagreement from questioning member homeowners and the IRS. No one approach will always be accepted and easy.

The "default position" for an HOA is to file Form 1120 as a regular corporation (subject to the limitations of IRC 277). HOAs doing this must consider: (1) the limit on the deduction of expenses for membership activities per IRC Section 277; (2) not paying tax on income to the extent Revenue Ruling 70-604 applies; and (3) IRC 118 capital contributions for reserve assessments.

Perhaps the most well known is the quasi-exempt status for HOAs. However, specific qualifications must be met to file Form 1120-H under IRC Section 528. It can be impossible to qualify in any given year (such as when significant reserves are assessed). Also, what if the election is "busted"?

Finally, what does it take to qualify for full tax-exempt status under IRC Section 501(c)? How can an HOA apply for and receive tax-exempt status, and how should a practitioner handle the IRS' insistence on non-member access?

Listen as our panel of experts details annual HOA considerations, including whether to file Form 1120 or an 1120-H, when and how to apply for tax-exempt status, applying Revenue Ruling 70-604 for overassessments, and other critical considerations for HOAs.