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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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Hello, I have just stumbled upon information about Condo

Customer Question

Hello,
I have just stumbled upon information about Condo Associations filing tax forms. Our condo association is small, 3 units, "unincorporated", in MA. Our condo dues pay for our common bills and repairs, and there is about $3000 saved, with no interest from savings. The condo has been around for about 7 years, 5 of which I have been managing the Trust, but did not know about condo associations filing taxes. Also, we are in MA and I think a law went into effect in 2009 as well, that may now require all condo associations to pay a state tax of a minimum of $400-500, which would be a lot if we have to pay back years. Do we have to file (Federal and State?) since we have no outside income other than our own dues? And, if so, do we need to file back year forms? What happens if we don't file?
Thank you
Submitted: 8 months ago.
Category: Tax
Expert:  Lev replied 8 months ago.

Lev :

Hi and welcome to our site!
Qualifying homeowners' associations that are exempt under IRC 528 are taxable only to the extent provided therein. IRC 528 exempts from income tax any dues or assessments received by qualified homeowners' associations from property owner-members of the organization, where these dues and assessments are used for the maintenance and improvement of its property. All homeowners' associations described in IRC 528 may qualify for this sort of quasi-exempt status by election.

Lev :

IRC 528 defines a qualified "homeowners' association" as an organization that is a condominium management association or a residential real estate management association if:
1. it is organized and operated to provide for the acquisition, construction, management, maintenance, and care of
association property;
2. it elects to have the section apply for the taxable year;
3. no part of the net earnings of the association inures to any private shareholder or individual;
4. 60 percent or more of the association's gross income consists solely of amounts received as membership dues, fees, or assessments from owners of residential units, residences or residential lots (exempt function income); and,
5. 90 percent or more of the association's expenditures for the taxable year are expenditures for the acquisition, construction, management, maintenance, and care of association property.

A homeowners association files Form 1120-H as its income tax return to take advantage of certain tax benefits. These benefits, in effect, allow the association to exclude exempt function income from its gross income.

If the association does not elect to use Form 1120-H, it must file the applicable income tax return, for example, Form 1120, U.S. Corporation Income Tax Return.

A homeowners association should compare its total tax computed on Form 1120-H with its total tax computed on Form 1120. The association may file the form that results in the lowest tax.

Lev :

Here is the form to use - http://www.irs.gov/file_source/pub/irs-pdf/f1120h.pdf
For state income tax purposes...
Incorporated entities that qualify federally as homeowners associations under IRC § 528(c) will continue to file the appropriate Massachusetts corporate form, in the 355 series. Incorporated homeowners associations that qualify as tax exempt under IRC § 501(c)(4) will file the Form M990-T-62. Unincorporated entities that do not qualify as homeowners associations under IRC § 528(c) (such as the so-called "IRC § 277 filers") and that file a federal corporate form (usually the Federal Form 1120) must file a Massachusetts corporate excise return in the 355 series.

Expert:  Lev replied 8 months ago.
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Expert:  Lev replied 8 months ago.
Just in case you were not able to use the chat - I am switching to Q&A mode and posting the answer below.
Please feel free to communicate if you need any clarification or have other tax related issues.

Qualifying homeowners' associations that are exempt under IRC 528 are taxable only to the extent provided therein. IRC 528 exempts from income tax any dues or assessments received by qualified homeowners' associations from property owner-members of the organization, where these dues and assessments are used for the maintenance and improvement of its property. All homeowners' associations described in IRC 528 may qualify for this sort of quasi-exempt status by election.

IRC 528 defines a qualified "homeowners' association" as an organization that is a condominium management association or a residential real estate management association if:
1. it is organized and operated to provide for the acquisition, construction, management, maintenance, and care of
association property;
2. it elects to have the section apply for the taxable year;
3. no part of the net earnings of the association inures to any private shareholder or individual;
4. 60 percent or more of the association's gross income consists solely of amounts received as membership dues, fees, or assessments from owners of residential units, residences or residential lots (exempt function income); and,
5. 90 percent or more of the association's expenditures for the taxable year are expenditures for the acquisition, construction, management, maintenance, and care of association property.


A homeowners association files Form 1120-H as its income tax return to take advantage of certain tax benefits. These benefits, in effect, allow the association to exclude exempt function income from its gross income.

If the association does not elect to use Form 1120-H, it must file the applicable income tax return, for example, Form 1120, U.S. Corporation Income Tax Return.

A homeowners association should compare its total tax computed on Form 1120-H with its total tax computed on Form 1120. The association may file the form that results in the lowest tax.

Here is the form to use - http://www.irs.gov/file_source/pub/irs-pdf/f1120h.pdf
For state income tax purposes...
Incorporated entities that qualify federally as homeowners associations under IRC § 528(c) will continue to file the appropriate Massachusetts corporate form, in the 355 series. Incorporated homeowners associations that qualify as tax exempt under IRC § 501(c)(4) will file the Form M990-T-62. Unincorporated entities that do not qualify as homeowners associations under IRC § 528(c) (such as the so-called "IRC § 277 filers") and that file a federal corporate form (usually the Federal Form 1120) must file a Massachusetts corporate excise return in the 355 series.


Let me know if you need any help.
Customer: replied 8 months ago.

I have read your answer. I've seen this information from goggle searches.


What I would like to know is, since we are such a small condo association with no income other than our dues and have never filed, do we have to file?


If so, do we have to or should we file for past years?


What will happen when we do, are there penalties on the Fed and State level?


What can happen if we never file on the fed or state level, since we are so small and haven't filed to date?
Thank you.

Expert:  Lev replied 8 months ago.
The answer is based on IRS publications and regulations as well as on Massachusetts state tax laws...
If you may goggle the same information on other sites - most likely the information on these sites is based on same sources and as such shoudl be correct..
I will address all your questions - please feel free if you need any clarification.

What I would like to know is, since we are such a small condo association with no income other than our dues and have never filed, do we have to file?

There are NO difference between small or large condo associations - all are regulated as homeowners associations (HOA) and are required to file the tax return as mentioned above.

If so, do we have to or should we file for past years?

Yes - your condo association is required to file the tax return for each year it existed.

What will happen when we do, are there penalties on the Fed and State level?

If you do not timely file your tax return - you will not be able to make a choice either to file form 1120H or 1120 - and will be required to use 1120.
There will be penalties for late filing and if you owe any taxes - there might be late payment penalties. Penalties might be abated if you file late because of reasonable cause.

What can happen if we never file on the fed or state level, since we are so small and haven't filed to date?
If your condo association will be audited by either IRS or MA DOR - there will be penalties assessed. I may not say if you will or will not be audited - but that is possible. Also - if no tax return was filed - the statute of limitation on assessment would not be applie.
Customer: replied 8 months ago.

Can you please clarify what state form to use if we are an unincorporated homeowner association. I can't seem to see the information from your paragraph on the state forms (below):



"For state income tax purposes...
Incorporated entities that qualify federally as homeowners associations under IRC § 528(c) will continue to file the appropriate Massachusetts corporate form, in the 355 series. Incorporated homeowners associations that qualify as tax exempt under IRC § 501(c)(4) will file the Form M990-T-62. Unincorporated entities that do not qualify as homeowners associations under IRC § 528(c) (such as the so-called "IRC § 277 filers") and that file a federal corporate form (usually the Federal Form 1120) must file a Massachusetts corporate excise return in the 355 series."


Thank you.

Expert:  Lev replied 8 months ago.
Here is a form M990-T-62 -
2012 - http://www.mass.gov/dor/docs/dor/forms/inctax12/addl/m-990t-62.pdf
2011 - http://www.mass.gov/dor/docs/dor/forms/inctax11/addl/m-990t-62.pdf
2010 - http://www.mass.gov/dor/docs/dor/forms/inctax10/addl/m-990t-62.pdf
Here is form 355 -
2012 - http://www.mass.gov/dor/docs/dor/forms/corp12/355/355.pdf
2011 - http://www.mass.gov/dor/docs/dor/forms/corp11/355/355.pdf
2010 - http://www.mass.gov/dor/docs/dor/forms/corp10/355/355.pdf

Which state form to use depends on which form you are filing for federal tax purposes.
If you file federal form 1120H - use state form M990-T-62
if you file federal form 1120 - use state form 355

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