11/3/2023 0 Comments Money stack in handAuthority of the Community Association Board of Directors It must either: (1) return the excess assessments to the membership or (2) apply the excess assessments to the next fiscal year, thereby reducing the subsequent year's annual assessment. Accordingly, your community association may not apply excess assessments to its reserve account. Your community association's membership will need to do the same to take advantage of this tax exemption-take a vote (either in person or by written ballot) before the association files its Form 1120.Īfter issuing this ruling, the IRS clarified, in several informational letters, that the ruling did not mean that condominium and homeowners associations could retain excess assessments from year to year in a working capital reserve without recognizing the amounts as taxable income. In its ruling, the IRS noted that the stockholder-owners of the condominium association held a meeting each year at which they decided what to do with any excess assessments not actually used for association expenses. The IRS made this key ruling with respect to excess assessments received by a condominium management corporation. Where a community association has received assessments from its members during the year in excess of its budgeted expenses, the Internal Revenue Service ("IRS") determined, in Revenue Ruling 70-604, that the excess amounts are not taxable income to the association itself where the members vote at the end of the year either to: (1) apply excess assessments to their future assessments or (2) rebate the excess amounts back to the members. For example, Revenue Ruling 75-370 found that condominium owner assessments are not treated as taxable income to the condominium association "since the funds are received by the community association for the unit owners to be used solely for the benefit of the unit owners." Handling Excess Assessments Under these standard tax rules, taxable gross income includes "all income from whatever source derived." Code Section 61.īut in the case of membership funds paid to community associations, the funds are viewed not necessarily as income but as monies held by an agent (the community association) to pay expenses for its principal (the members or owners of the community association). Taxation as a Regular CorporationĪ community association that does not elect to be taxed as a Code Section 528 homeowners association (and file a Form 1120-H) is taxed as a regular corporation subject to standard federal and state income taxes. However, the good news is that "homeowner association income" does not include membership dues, fees, and assessments. If your community association chooses to file a Form 1120-H, it will be taxed at a 30% federal income tax rate on its "homeowners association income." In addition, the election means that the association is not eligible to avoid tax on excess income. Oftentimes, a community association's articles of incorporation, bylaws, or declaration will require that the association make this election. Income Tax Return for Homeowners Associations"). However, a community association may elect to be taxed as a "homeowners association" under Section 528 of the Internal Revenue Code of 1986, as amended ("Code"), and file a Form 1120-H ("U.S. Corporate Income Tax Return") at the federal level. This means community associations should file an IRS Form 1120 ("U.S. Taxation of Community AssociationsĪlmost all community associations in North Carolina are formed as non-profit corporations, which are taxed as corporations. On the surface, this might appear to be a bonus, but if not handled properly, it can quickly turn into an unexpected tax burden. OctoWas your community association lucky enough to come in under budget last year?
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