By Evelyn Dufford, PCAM
Yep, its tax time and we’re all anxiously awaiting W-2’s and 1099 statements. But what about Community Associations? Aren’t they a nonprofit?
Yes and No.
First the Yes. In the eyes of Washington State and most other states Homeowners and Condominium Association as corporations that are registered at the state level as Nonprofit Corporations. They have Articles of Incorporation filed with the Secretary of State. Every year the license needs to be renewed with updated information about our Board of Directors and Officers.
And then the No. The Internal Revenue Service views most Homeowners and Condominium Association as true corporations. Now the fun part, I say most because there are some, although few, which qualify as true nonprofit – tax exempt organizations. They provide substantial services, like a city or a county, provide for the common good of society and they have gotten a determination letter from the IRS. Most of the other Associations and all of the ones I’ve worked with over the past 16 years have been true corporations. There may be a statement in your Articles of Incorporation that the Association is organized as a corporation for homeowners associations as defined by the Internal Revenue Code Section 528.
Now I’m spouting IRS Tax Code. I apologize as the CPA in me just took over for a moment. Let me explain it this way. As corporations, there are IRS rules that all corporations have to follow. The IRS carved out a set of rules specifically for Homeowners and Condominium Associations. Every year the Association gets to choose whether to file as a regular corporation (form 1120) or as a Homeowners Association (form 1120H). There are reasons to consider each form every year. And this is best left to your favorite CPA.
So if we have no taxable income, do we really have to file? Yes! From a tax stand point, 1120H is an election. By filing form 1120H we make that election. If we don’t file, then we have not made the election and form 1120 is required. From a legal stand point, all Associations need to act like corporations to protect its self. If you don’t file a tax return, you’re not acting like a corporation and it could expose the Association to risk in a law suit.
March 15th is right around the corner, that’s when the corporation tax returns are due. So if you have any questions, now would be the time to ask. And you should probably consider filing an extension to cover your bases. There is much more information on our favorite audit firms web site. Go to http://www.hoacpa.com/CandC/about.html and check out the FAQs.