Must an Association file federal income taxes?
May 12, 2016
In Tennessee, homeowners associations and condominiums associations are generally formed as non-profit corporations. This means that they are corporations that are not intended to make a profit; they are not “businesses”. They are not charitable organizations. Homeowners associations and condominium associations must file federal income tax returns, just like any other corporation. However, because of their nature as a mutual benefit non-profit corporation, the income tax rules for homeowners associations and condominium associations are a bit different.
First, “a homeowners association” is defined by the Internal Revenue Code (see 26 U.S.C. § 528(c)) as an organization which is a condominium management association, a residential real estate management association, or a timeshare association and: (i) the organization is organized and operated to provide for the acquisition, construction, management, maintenance, and care of association property; (ii) sixty percent (60%) or more of the gross income of the organization for the taxable year consists solely of amounts received as membership dues, fees, or assessments from owners of residential units, lots, or timeshare rights; (iii) ninety percent (90%) or more of the expenditures of the organization for the taxable year are expenditures for the acquisition, construction, management, maintenance, and care of association property; (iv) no part of the net earnings of the organization inures to the benefit of any private member or individual; and (v) such organization elects to have this section apply for the taxable year. By and large this definition applies to all homeowners and condominium owners associations with which we work. This means that 26 U.S.C. § 528 applies to such associations and permits (requires?) such associations to file a Form 1120-H tax return. The Form 1120-H is a streamlined form created by the IRS for homeowners associations.
The IRS provides that membership dues, fees, or assessments from lot owners or unit owners are defined as “Exempt Function Income”. Exempt Function Income is included on the Form 1120-H, but is not used in calculating an association’s income tax liability. Exempt Function Income is solely reported to ensure that the association meets the definitional requirements of 26 U.S.C. § 528. Again, Exempt Function Income is not used to calculate an association’s tax liability. Income used to calculate an association’s tax liability would be, for example, interest on bank accounts and rental payments paid to the association. The association receives, currently, a specific deduction of ONE HUNDRED AND 00/100 DOLLARS ($100.00). In the event there is a positive difference between income to the association and the specific deduction, the association pays income tax on the difference in the amount of thirty percent (30%) of such income. Given current interest rates, it is unlikely that an association will make much, if any, in the way of interest. So, the real potential income to an association is rent.
Interestingly, an association’s taxes must be reported by the fifteenth (15th) day of the third (3rd) month of the end of its fiscal year. Since many associations run on a calendar year, this means that associations must report their taxes by March 15th.
Tags: assessments, association, board of directors, bylaws, CCRs, condominium, condominium association, condominium unit, Declaration of Covenants Conditions and Restrictions, HOA, homeowner, homeowners association, Horizontal Property Act, income taxes, irs, laws, Master Deed, non-profit corporation, Tennessee, Tennessee Condominium Act