When it comes to filing taxes for a community association, IRS Form 1120 H is usually the form that comes to mind. But not everyone knows what it is, when to use it, or how it compares to the regular corporate tax form. Filing taxes may not be the most exciting part of running an association, but it’s a crucial one.
What is IRS Form 1120 H?
IRS Form 1120-H is a tax form designed for homeowners associations, condo associations, and similar organizations. It gives these associations a more straightforward way to report income and expenses without having to file the complex standard corporate return.
By using this form, an association can separate its exempt function income, such as dues and homeowners’ assessments, from taxable income, such as interest or rental income.
An association elects to use Form 1120-H by filing it on time. Associations must make this election every year by the due date of the return, including extensions. Once the association files the form, it cannot revoke the choice for that tax year unless the IRS grants consent.
There is also an automatic 12-month extension available if an association fails to make the election but takes corrective action within that window. Taxable income under 1120-H is taxed at a flat 30 percent for condominium and residential real estate management associations and 32 percent for timeshare associations.
Do Associations Pay HOA Taxes?
Yes, associations must pay taxes just like any other organization. Associations do not automatically escape tax obligations. If an association owes taxes, it must pay the full amount by the deadline.
Associations must pay the taxes separately, rather than including them with the return. They can usually make these payments through the Electronic Federal Tax Payment System (EFTPS) or another approved method.
The IRS imposes penalties for failure to pay on time. In general, if an association fails to pay its tax when due, the penalty is one-half of 1% of the unpaid tax for each month or part of a month the tax remains unpaid.
This can add up to a maximum of 25 percent of the total unpaid tax. That said, if the association can demonstrate that the delay was due to reasonable cause, the IRS may waive the penalty.
There is an exception for associations that qualify to file under 1120-H. When an association meets the IRS criteria, much of its income is falls under exempt function income and is not subject to tax. Only non-exempt income, such as earnings from a clubhouse rental, is taxable.
Is a HOA Tax Return Required?
Yes. A homeowners association tax return must be filed even if the association does not owe any taxes. The IRS requires HOAs and condo associations to report their income, expenses, and tax liabilities, regardless of whether the final number due is zero.
The IRS defines three kinds of qualifying homeowners associations:
- Condominium management associations
- Residential real estate management associations
- Timeshare associations
To qualify as an association:
- At least 60 percent of the association’s gross income must come from exempt function income,
- At least 90 percent of its expenses must go to property care and management, and
- No private individual can profit from its net earnings outside of association operations.
Unless the IRS recognizes the association as a 501(c)(3) organization, the association must pay federal taxes and file federal tax returns.
Form 1120-H vs Form 1120: What’s the Difference?
Form 1120 is the standard corporate tax return that most businesses use. It’s more complicated, requires more detailed reporting, and usually demands the help of a tax professional to get it right. Form 1120-H, on the other hand, was created specifically for associations.
The leading reason associations prefer 1120-H is its simplicity. With this form, an association only needs to separate exempt income from taxable income and then pay tax on the taxable portion.
While the IRS allows associations to compare both returns and file whichever results in the lowest tax, most stick with 1120-H because it reduces complexity and risk. Form 1120 may sometimes result in a lower tax bill if the association has very little taxable income and plenty of deductions. But for most associations, the streamlined approach of 1120-H makes more sense.
1120 H Filing Requirements
Let’s break down the filing requirements for Form 1120-H.
Taxable Income vs Exempt Function Income
Exempt function income includes homeowners’ membership dues, assessments, and fees. These are not taxed. Examples include assessments for paying property taxes, maintaining common areas, or clearing snow.
Taxable income, by contrast, comes from items such as bank interest, rental fees, and charges for special use of facilities.
When and Where to File
Form 1120-H is generally due on the 15th day of the fourth month after the tax year ends. Associations with a fiscal year ending June 30 file by the 15th day of the third month after year-end.
Associations operating in Virginia must send their returns to the following address:
Department of the Treasury
Internal Revenue Service Center
Kansas City, MO
64999-0012
If the deadline falls on a weekend or holiday, the next business day is acceptable.
Who Must Sign
The president, vice president, treasurer, assistant treasurer, chief accounting officer, or any other officer authorized to sign must sign the return.
If a paid preparer completes the return, they must sign in the preparer section, provide the required details, and give the association a copy if a trustee or receiver signs instead, a court order authorizing the signature must accompany the filing.
Attachments
The IRS requires attachments in a specific order. Schedules, supporting forms, and statements must be arranged alphabetically or numerically as directed, followed by any supporting explanations. Each attachment must show the association’s name and EIN.
Extensions
If an association can’t file on time, it may request an extension. Associations can do this through Form 7004. The extension provides more time to file the return, but not to pay the taxes due. Associations must pay their taxes on time.
A Guide to 1120 H Electronic Filing
Many associations now prefer to file 1120 H online instead of mailing paper forms. Electronic filing provides faster processing, fewer mistakes, and confirmation that the IRS received the return.
Beginning in January 2025, associations will be able to file Form 1120-H electronically. They can also file related forms, such as Form 7004, employment tax returns, and information returns, through e-file.
If payment is due, the IRS allows electronic funds withdrawal. Associations filing 10 or more returns in a year are required to e-file unless they receive a waiver.
Penalty for Failure to File Tax Returns
The IRS has increased the minimum penalty for failing to file a tax return that is more than 60 days late. For returns required in 2025 and beyond, the minimum penalty is the smaller of the unpaid tax or $510.
Late filing can also cause the association to lose its right to elect Form 1120-H for that year. On top of that, the penalty for a late return is generally 5 percent of the unpaid tax for every month or part of a month the return is late, capped at 25 percent of the unpaid tax.
Interest is also charged on late taxes and penalties. Still, the IRS will not impose penalties if the association can demonstrate reasonable cause for the delay. Just like with late payment penalties, the IRS may waive the fine if the association shows reasonable cause for the delay.
A Good Taxpayer
Choosing between IRS Form 1120-H and Form 1120 is an essential step for every association. While both options exist, most associations stick with 1120-H for its simplicity and straightforward process. Whichever option an association chooses, the most important thing is to file returns and pay taxes on time to avoid IRS trouble.
National Realty Partners is a leading provider of association management services in Virginia. We can help your board navigate tax returns. Call us today at 703-435-3800 or request a proposal online to get started!
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