Federal Income Tax Law
Condominium associations are unique in that the Internal Revenue Service (IRS) allows them to elect annually to be taxed as a regular corporation or receive special treatment and be taxed as a homeowners’ association. If electing to be taxed as a regular corporation IRC § 277 applies and Form
1120 is filed. If electing to be taxed as a homeowners’ association IRC § 528 applies and Form 1120-H is filed. The board of directors can seek advice from accountants, attorney or property manager but must ultimately decide which form to file. In order to make that choice they need to know details about the specifics of each filing option. Many associations tend to file ...view middle of the document...
Most condominium associations receive revenue for yearly operations (operating assessments) and future major repairs and replacements (reserve assessments). The reserve assessments are often allocated only to repairs and replacements of a capital nature. As such, the association has established a tax position that these capital assessments are non-taxable.
Form 1120 – IRC § 277
The board of directors may choose file Form 1120 and be taxed as a regular corporation under IRC § 277. This tax form is rather complex and subjects the association to many filing and documentation requirements. However, this choice yields half the tax liability of the 1120-H on the first $50,000 of taxable income. Net membership and non-membership income are taxed as regular corporate rates. However an association may be able to defer membership income under Revenue Ruling 70-604. Excess deductions or losses may be carried forward to offset future gains. IRC § 277 was added to the Internal Revenue Code in 1969 (Checkpoint, 503) with the intention of reducing abuse of the tax code by nonexempt membership organizations. The purpose was to “prevent taxable membership organizations from avoiding tax on non-membership income by operating membership activities at a loss and using that loss to offset the non-membership income” (Checkpoint, 503).
Associations choosing Form 1120 are taxed on both membership and non-membership income, net of membership and non-membership expenses. Unit owners are considered members of the association and assessment income, service fees, late charges, and other fees received by owners are membership income. Non-membership income typically comes from interest income on savings and investment and revenue received from outside parties, such as recreational facilities charges received from guests and marketing incentive payments from cable television companies and internet service providers. Expenses incurred in connection with membership income include those related to the operations, maintenance and management of the condominium association, such as utilities, payroll, repair costs, management fees, and accounting fees. Non-membership expenses also include a portion of management and accounting fees as well as utilities, maintenance and insurance paid for facilities or services that help generate non-member income. As long as non-membership activities are profit motivated, any net non-membership loss from one source may be used to offset gains from other sources. This aggregation allows associations to use losses from sources such as party room rentals and garage parking income to offset gains from interest income. This stems from the United States Supreme Court Case Portland...