Choosing between using Form 1120-H and Form 1120 requires careful consideration.
Homeowners associations are required to pay income tax, and section 528 of the tax code provides them with the option of utilizing either Form 1120H or Form 1120. Making the decision as to which form to use requires a careful assessment and planning, as the decision for a particular tax year must be made by the established due date (including extensions), and even if an extension is taken the tax must be paid by the due date. The decision to use Form 1120H in a particular tax year is generally irrevocable, although it is possible for a homeowners association to request consent from the IRS to change its election. In order to take advantage of this, the association must request IRS consent and must pay a user fee. For details on the process of requesting a ruling request, homeowners associations should refer to Rev. Proc. 2014-1, 2014-1 I.R.B. 1.
Homeowners associations should take the time to analyze what their tax burden is under Form 1120-H as compared to using Form 1120, U.S. Corporation Income Tax Return and select the form that requires the lowest payment. One or the other must be used.
Homeowners associations that do not file the appropriate paperwork to be recognized as a homeowners association have the opportunity to file for an automatic 12-month extension. Doing so requires that the appropriate section 528 regulatory election is taken correctively during that twelve-month period. For details on filing for a 12-month extension, homeowners associations should refer to Regulations section 301.9100-2.
Choosing between using Form 1120-H and Form 1120 requires careful consideration. Though Form 1120-H provides the benefit of a flat 30 percent tax rate for residential real estate associations and condominium management associations, using Form 1120 offers a sliding scale of tax rates that can be seen in the table below. Timeshare associations pay a 32% flat tax rate. Both capital gains and ordinary income fall under the tax rates shown.