Taxation of the Community Association: A Short Overview.
A common misconception is that community associations (condominiums, homeowner and neighborhood associations) are exempt from taxes. This myth may derive from the fact that many associations are nonprofit entities. However, simply because an association is a nonprofit corporation does not mean the entity is tax exempt. In fact, most community associations are subject to federal, state, and local taxes. The purpose of this article is to provide a general introduction to the various tax regimes to which a community association may be subject.[1]
Each association should apply for an Employer Identification Number by filing a Form SS-4 with the Internal Revenue Service. This number will identify the association on each of its corporate returns.
Local Taxation of the Association
Local tax takes the form of sales taxes and property taxes, also called ad valorem taxes. Property taxes are paid to the county on an annual basis for real estate owned by the association. If the association chooses not to pay these taxes, the county or an investor may ultimately own the real estate owned by the association, a troubling result for the association and its members.
Federal Taxation of the Association
Depending on whether the association employs various persons, the association may be required to remit income withholding taxes on behalf of its employees, as well as Federal Unemployment Tax Assessment, or FUTA. It is crucial for the association to understand its withholding requirements or employ an accountant to manage the taxation aspects of the association.
In 1976, Congress adopted section 528 to the Internal Revenue Code.[2] This section is an association-specific tax provision. Essentially, the section allows the association to calculate its income taxes either under the standard corporate taxation scheme (as reported on Form 1120) or determine the income tax liability under the section 528 provisions (as reported on Form 1120H). Further explanation of Section 528 may be found in the 1120H instructions found at www.irs.gov and in the interpretive regulations to Section 528 in the Code of Federal Regulations, Section 1.528-1 through 1.528-10.
In short, Section 528 takes the gross income of the association, reduces the gross income by the “exempt function income,” deducts certain allowable expenses, applies a straight $100.00 deduction, and taxes the remainder by a flat thirty (30%) percent.
The form must be filed by March 15 and must be signed by an officer of the association, and any paid preparer.
State Taxation of the Association
As with federal taxation of income, the association could incur state income taxation. This would be income tax owed on the unrelated business income of the association, such as interest or membership fees. In Oklahoma, the reporting form is 512E. If the association operates as a non-profit corporation, then franchise taxes will not be owed.[3] Finally, if the association operates as a limited liability company, then an annual certificate fee will be owed to the state.
[1] The author is an attorney not an accountant or tax advisor. This article represents neither tax or legal advice nor an offer to provide either. The author highly recommends that each community association find a competent tax advisor.
[2] 26 USCA §528
[3] 68 O.S. §1206 exempts non-profit corporations from the payment of franchise taxes.
Comments