Part 2: How Associations Are Taxed Under Form 1120-H
In Part 2 of our series, we take a closer look at Form 1120-H. Most condominium and homeowners associations elect to file Form 1120-H each year. Why? Because it is simpler and provides a relatively low-risk filing structure.
What Is Form 1120-H?
Form 1120-H was created specifically for homeowner, condominium, and timeshare associations under Internal Revenue Code Section 528. In order to file Form 1120-H, associations must meet certain requirements including income and expense ratios, and a residential-test which requires 85% or more of the association to be residential. While most associations meet the income and expense ratios, the residential test will prevent commercial condominiums and certain mixed-use associations from filing Form 1120-H.
What Income Is Taxed Under 1120-H?
Under Form 1120-H, association income is divided into two categories:
- Exempt function income – not taxable
- Non-exempt function income – taxable
Examples of exempt function income (not taxable):
- Member assessments
- Special assessments
- Late fees and legal fees
Examples of non-exempt function income (taxable):
- Interest earned on bank and investment accounts
- Clubhouse rentals or pool passes
- Cell tower lease income
- Laundry or vending contracts
- Newsletter advertising
In general, taxable income includes income from nonmembers and income from members for services. Associations are allowed to deduct expenses directly related to producing their non-exempt function income.
What Is the Tax Rate?
Under Form 1120-H:
- Tax is imposed at a flat 30% rate (compared to 21% under Form 1120).
- A $100 standard deduction is allowed.
Pros & Cons
Although Form 1120-H carries a higher tax rate than Form 1120, it is generally considered lower risk and less complex to prepare. For many associations, the simplicity and lower preparation costs outweigh the higher tax rate — but not always.
In Part 3, we’ll discuss when filing Form 1120 may be more beneficial.