Form 1120-H vs. Form 1120: What HOA Boards Should Know
Understand the differences between the two federal filing approaches available to qualifying homeowners associations and why the analysis should be performed annually.
An HOA May Have More Than One Federal Filing Option
Many homeowners association boards assume there is only one way to file the association's federal income tax return.
In reality, qualifying homeowners associations may elect to file Form 1120-H under IRC §528 or file the regular corporate income tax return, Form 1120. The IRS specifically advises associations to compare the tax under both forms because the association may file the form producing the lower tax when eligible.
Form 1120-H
Form 1120-H was designed specifically for qualifying homeowners associations.
To qualify under §528, an association generally must satisfy several requirements, including:
At least 60% of gross income must consist of exempt function income.
At least 90% of expenditures must be for qualifying association purposes.
No private shareholder or individual may improperly benefit from the association's net earnings.
The association must make the §528 election by filing Form 1120-H.
Qualifying exempt-function income generally receives favorable treatment, while taxable income is subject to the applicable Form 1120-H rules. For residential real estate management and condominium associations, taxable income on Form 1120-H is generally subject to a 30% rate; timeshare associations generally use 32%.
Form 1120
An HOA can instead be taxable as a regular corporation and file Form 1120.
The tax treatment is different, and the determination of taxable membership and nonmembership income and related expenses can become more complex.
Depending on the association's activities, investment income, expenses, reserves, capital transactions, and other circumstances, Form 1120 can sometimes produce a different result than Form 1120-H.
Why the Comparison Matters
An HOA should not automatically use the same filing method every year simply because it was used previously.
Changes in:
- Assessment income
- Interest income
- Investment earnings
- Operating expenditures
- Reserve activity
- Special assessments
- Property transactions
can affect the analysis.
A Year-by-Year Decision
At Akato & Associates, we evaluate the association's financial activity and filing eligibility to determine the appropriate federal filing approach rather than automatically defaulting to one form.
This material is provided for general information only and does not constitute accounting, tax or legal advice. It does not take account of your particular circumstances. Contact the firm before acting on anything you read here.