Form 1120-H for associations

What Form 1120-H is

Form 1120-H is the U.S. income tax return for homeowners associations. It exists because of section 528 of the Internal Revenue Code, which lets a qualifying association elect to be taxed only on income that does not come from its members in their capacity as owners.

An association files Form 1120-H to make that election for the year.

Who can file it

Under the IRS instructions, the associations that may file include:

• Condominium management associations, where substantially all of the units are homes for individuals.
• Residential real estate management associations, such as homeowners associations.

For the "substantially all" test, the instructions refer to Regulations section 1.528-4.

The qualification tests

To file Form 1120-H for a tax year, the association must meet each of these tests for that year:

1. 60% gross income test. At least 60% of the association's gross income for the year must be exempt function income.
2. 90% expenditure test. At least 90% of the association's expenditures for the year must be for acquiring, building, managing, maintaining, and caring for association property.
3. No private benefit. No shareholder or individual may profit from the association's net earnings, except through acquiring, building, managing, maintaining, or caring for association property, or through a rebate of excess membership dues, fees, or assessments.

Because the tests apply each year, the way income and expenses are classified in the association's records matters when the return is prepared.

Exempt function and taxable income

Exempt function income is the dues, fees, and assessments the association receives from members in their capacity as owners.

Other income is generally taxable on Form 1120-H. The IRS instructions give examples, including:

• Income from nonmembers.
• Interest, including interest earned on reserve or sinking funds.
• Payments for work on property that is not association property.

Form 1120-H taxes this income at a flat rate of 30%.

An election made each year

The section 528 election is not permanent. The association makes it separately for each tax year by filing a completed Form 1120-H, generally by the due date including extensions.

Once made for a year, the election cannot be revoked for that year without the consent of the IRS.

The $100 specific deduction

In figuring taxable income, Form 1120-H allows a specific deduction of $100. The net operating loss deduction and the special deductions available to other corporations are not allowed.

When it is due

Generally, Form 1120-H is due by the 15th day of the 4th month after the end of the association's tax year. For a calendar-year association, that is April 15.

The instructions note an exception: for a fiscal year ending June 30, the return is due by the 15th day of the 3rd month after year-end.

Records to have ready

The tests and the return draw on the same information as the year-end financial statements. It helps to have:

• The year-end financial statements and general ledger.
• A breakdown of income separating member assessments from other income, such as interest and amounts from nonmembers.
• Bank and investment statements showing interest earned, including on reserve accounts.
• A breakdown of expenditures for the 90% expenditure test.
• The prior year's Form 1120-H and any IRS correspondence.

Once engaged, associations exchange records with us through our secure Feldman One client portal. The documents checklist covers the year-end request.

What this page does not cover

• State filing requirements.
• How particular items of income or expense are treated for your association. Those depend on the facts.
• Florida's annual financial report rules. See Florida reporting requirements.