Homeowners associations file annual tax returns like any other registered corporation. The only difference is that HOAs have distinct taxation laws with different rates. When filing tax returns, your association can select from two filing methods—Form 1120-H or Form 1120. Interestingly, an HOA can switch from one filing option to another each financial year. Each form has its upsides and downsides. This guide explains the difference between Forms 1120-H and 1120 to help you select the appropriate filing method for your HOA.

What Is Form 1120-H?

Filing Form 1120-H is one of the most straightforward ways for HOAs to submit income tax returns. The form has a flat tax rate of 30% on taxable income. Under IRC Section 528, HOAs that use their function income to maintain the community should remain tax-exempt. This filing method allows the HOA to deduct its function income from its gross income.

An HOA must meet specific requirements to file Form 1120-H. At least 60% of the HOA’s gross income must be exempt function income. 90% of expenses, including reserve expenses, must be exempt function (maintenance and operational costs). Lastly, 85% of the HOA community must be residential.

What Is Form 1120?

Form 1120 is ideal for HOAs registered as C corporations under IRC Section 277. Many consider it the default tax filing method for homeowners associations. It has a tax rate of 15% on the first $50,000 of taxable income. This filing option is more complex than 1120-H and requires the expertise of professional HOA accountants and tax experts. In any case, it entails filling out numerous documents. HOAs must report their net income, losses, and deductions. One notable advantage of Form 1120 is that it allows an HOA to determine its income tax liability.

Difference Between 1120-H and 1120

Forms 1120-H and 1120 are all filing methods for HOAs and similar organizations. Your association may elect to use either of the two. However, these forms have slight differences, and some circumstances may call for a particular filing option over the other.

While filing Form 1120-H is more straightforward, it has stringent eligibility requirements for HOAs. In contrast, filing Form 1120 is more complex but easier to qualify than Form 1120-H. Another notable difference is that Form 1120-H has a flat tax rate, while Form 1120 charges 15% on the first $50,000 taxable income.

Contact Abel Accountants for assistance in filing your HOA tax return.