In spite of the fact that most HOAs are nonprofit corporations, tax filing is still required. A few HOAs qualify under Internal Revenue Code 501(c)(4) as tax exempt if use of common property is extended to the general public. Otherwise, the HOA must file a federal tax return using either Form 1120 (regular corporation) or a Form 1120-H (for HOAs).

To qualify for Form 1120-H, the HOA must meet three criteria:

1. At least 60 percent of the revenue must be exempt income;

2. At least 90 percent of expenditures must be for exempt activities; and

3. The HOA must be substantially residential.

Exempt income is fees levied to maintain the common property. Non-exempt income is derived from things like investment interest, laundry or vending equipment, unit rental and special user fees for HOA facilities.

The advantages of the Form 1120-H include its simplicity, taxes are owed only on non-exempt income, and that there is an automatic $100 deduction. The tax rate on non-exempt income is 30 percent.

The advantage of Form 1120 is a lower tax rate of 15 percent for the first $50,000 of taxable income. However, the return is more complex and requires adherence to a variety of tax code sections and rulings. Under the Form 1120, if there is excess exempt income over expenses it is taxed unless the association refunds the excess or transfers it to capital reserves through a vote of the members. The options are set forth in IRS Revenue Ruling 70-604 and must be included in a resolution submitted to a vote of the members.

If your HOA hasn't been filing taxes, get on the stick and discuss your options with a knowledgeable CPA. "Cuz I'm the taxman...and you're working for no one but me."

Thanks to www.OrtenHindman.com for the information.

Published: March 31, 2004

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Richard Thompson owns Regenesis, a management consulting company that specializes in condominium and homeowner associations. He is a nationally recognized expert on HOA management issues. Regenesis publishes The Regenesis Report, a monthly newsletter for HOA boards, developers and managers. To subscribe, go to Regenesis.net. He can be contacted by email at .