1120 vs 1120H
Form 1120 vs. Form 1120-H
For condominiums looking to file federal income taxes, either Form 1120 or 1120-H are acceptable options under U.S. Tax Code. Form 1120, at first glance, looks far more appealing with its 15% tax rate as opposed to the 30% tax rate associated with Form 1120-H. However, since the 1120 is for general purpose corporate tax returns, there are far more regulations that a condominium must adhere to that may otherwise not be a priority.
If your condominium decides that it wants to file Form 1120, certain accounts must be set up and maintained from the beginning of your fiscal year. The 1120 requires that the capital and non-capital reserve accounts be separate and the budget must reflect the exact amount that you plan to spend, ranges are not acceptable. In addition, the reserve and operating accounts must be kept completely separate. All dues collected must quickly end up in the reserve accounts.
Any violation of these guidelines will result in heavy fines and the possibility that the IRS will look back through the full statute of limitations for tax filing (7 years) and find other fines they may have missed.
The 1120-H was designed specifically for homeowner’s associations and as such, is tailored more towards the way condominiums operate. To file this form, your entity must be organized and operated as a homeowner’s association. You must also make sure that a minimum of 60% of your income is from member’s dues and no less than 90% of your expenses are spent on maintaining communal spaces (including security expenses, administrative expenses, etc.). It is also unlawful for individual members to benefit financially from the condominium.
It can become very easy to accumulate fines from the IRS while filing the 1120 that more than offset the tax rate savings found between the 1120 and 1120-H. Seek professional consultation to determine which form would be most beneficial for your condominium to file.