Tax season is here once again! As nonprofit corporations, every community association in Ohio is required to file an annual tax return with the Internal Revenue Service. However, associations have the ability to choose between the filing of two different tax forms – Form 1120 or Form 1120-H. Form 1120-H is a short, simple, one-page form specifically designed by the IRS for community associations. In comparison, Form 1120 is a longer, more complex tax return, and is the standard form utilized by most corporations.
Associations must meet certain qualifying tests by the IRS to file a Form 1120-H. The primary requirements are that 60% of the association’s revenues must be from member assessments, 90% of expenditures must be for the management, maintenance, care, and improvement of the common elements, and 85% of the community must be residential. If an association meets these requirements, then filing Form 1120-H is extremely safe and comes with virtually no tax risk. Any taxable income listed on Form 1120-H will be taxed at a flat rate of 30%.
Since the longer, more complex Form 1120 is not designed for community associations, an association must carefully plan in advance to file it safely. If your association is audited by the IRS, failure to carefully comply with various financial procedures required for filing a Form 1120 may result in the assessment of back taxes, interest and penalties. With careful planning, however, the benefit of using a Form 1120 is that the association’s first $50,000 in income will be taxed at a 15% rate, as opposed to the 30% rate applicable to Form 1120-H. For associations with substantial taxable income, filing Form 1120 could result in significant tax savings. Community associations should consult with a tax professional to determine which form is appropriate, but one of the forms must be filed with the IRS on an annual basis.