Community associations are commonly referred to as homeowner associations, property owner associations, townhome associations, planned community associations or single-family neighborhoods. The vast majority of condominium and community associations are nonprofit corporations, but even they have to file taxes. There are some tips your community association should follow when it comes to tax time.
Nonprofit status for associations is established at the time the articles of incorporation are filed. Many believe that because an association is a nonprofit corporation it is not required to file income tax returns; however, both federal and state income tax returns are required and should be filed by March 15 of each year. Although most associations are nonprofits, they generally are not 501(c) charitable organizations, which is designated for charities such as schools and churches. This makes a difference.
Although taxes are assessed, condominium and community associations do receive an exemption on paying property taxes on common areas in North Carolina, provided certain requirements are met, such as the members of the association having the exclusive right to use the common areas. An exemption request must be made to the county or counties in which the common areas are located.
Unlike corporate entities, however, a condominium or community association may elect to file an 1120H (short form) or an 1120 itemized return. Which form you choose will depend on your year-end reconciliations and may change year to year. Your tax professional will advise the best form for your association in any given year.
It is worth noting that condominium and community association assessments are not taxed. When filing an 1120H (short form), an association receives a specific income deduction of $100 and pays 30 percent federal and 7.5 percent state (for North Carolina) on non-assessment income, such as interest earned, clubhouse rental income, and the like. When filing an 1120 itemized return, a number of exemptions may be claimed at a lower federal tax rate of 15 percent.
The general membership of a condominium or community association should reconcile the association’s excess income over expenses on an annual basis, in accordance with IRS code 70-604. Typically, this is handled at the annual membership meeting or the yearly budget ratification meeting. The majority of associations choose to allocate any excess income to offset future operating expenses.
It’s important not to confuse year-end financial statements and reports with the filing of federal and state taxes.
Many associations have one kind of financial year-end report completed by an accounting firm or CPA, in addition to filing taxes each year. The four types of financial reports associations select from are: a compilation; a compilation with disclosures; a review; or an audit. An audit is the most thorough report, as well as the most expensive, and it requires a significant amount of time as well as confirmations from third-party banks, attorneys and vendors.
Some associations’ governing documents dictate which type of year-end report is required and by whom. You should refer to your association’s governing documents to see if there are specific requirements for the year-end report.
If your association does not elect to have any year-end financial reports provided by a third-party professional, a professional management company will recommend at a minimum that federal and state income taxes be prepared by an expert. This ensures that a third party reviews the financial reports of your association.
Remember that a copy of federal and state tax returns with accompanying documentation should be kept for a minimum of seven years.
Call us today if you want to know more about taxes and how a professional can ensure your association’s compliance.
Mike Stonestreet is a 26-year veteran of the professional HOA management industry who has achieved one of the highest education-based designations in the field, that of Professional Community Association Manager (PCAM). Community Association Management Services (CAMS) has been a leading association management company since its inception in 1991. CAMS is a trusted provider of management services for more than 265 associations throughout North Carolina, South Carolina and Georgia. To find out how CAMS can benefit your community, call 910-256-2021, email [email protected], or visit www.CAMSmgt.com.
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