As a non-profit corporation, your association is likely NOT immune from having to report and pay taxes. If you are a board member for an association, it is part of your fiduciary duty to make sure that your association files its federal tax return within 75 days of the end of its tax year, which for most associations was December 31. Therefore, federal tax returns are due on March 15th. If you have a professional management company and/or CPA working with your community they will likely take care of preparation of your return but you should make sure to discuss the pending deadline with them. While taxes for community associations can be very simple, below are few things to remember:
- interest earnings are almost always taxable;
- laundry income, common area rental income, and the sales of goods or services to nonmembers is generally taxable as well;
- membership income (e.g. assessments ) is nontaxable as long as it meets certain standards.
Your association will also have to choose how to file its return. There are two options. First, it may file as a community association using Form 1120-H, or as a regular corporation using Form 1120. This decision can change annually and does not require IRS approval. Form 1120-H is designed for community associations and is the easiest to prepare. Nonexempt function income, such as interest and rental income, is taxed at 30 percent. Form 1120 is the regular corporation tax form. It is more complex and can result in the taxation of membership net income. Form 1120, however, has a more favorable tax rate and rental income may not be taxable. With proper planning and budgeting, an association may be able to cut its taxes. A common planning tool is Revenue Ruling 70-604, which states that members may elect to transfer net membership income to the next year or return it to the owners. Also, to use Form 1120 effectively, an association must segregate operating and reserve cash activity, prepare a budget and reserve study, and distribute the budget and reserve information to members in advance.
For more information on tax liability for associations contact one of our attorneys or a CPA who specializes in community association taxes.