Condo Media - March 2010 - 26

TAXES by Kenneth A. Bloom, CPA Tax Altering Experience New Tax Law Affects How Associations File he Commonwealth of Massachusetts has changed how the state’s condominium associations are taxed, effective for tax years beginning on and after Jan. 1, 2009. While the changes do not completely restore the T taxing structure to what it was prior to a 2008 tax law change, it does largely remedy the unintended consequences caused by a 2008 tax law change that would have significantly increased taxes on all Massachusetts condominium associations. Under the new law, the annual Massachusetts tax return filing requirement is (in all but a few isolated instances) determined by which federal tax return a condominium association files with the Internal Revenue Service. Condominiums that qualify and elect to file a Federal Form 1120-H will continue filing a Massachusetts Form 3M, a simple tax form to prepare with minimal income tax. Condominium associations that file a Federal Form 1120 will be required to file a Massachusetts Form 355, a much more complicated tax return to prepare, and will result in a significant tax liability. The primary exception to these rules is for those Massachusetts condominium associations that were created as corporations. Historically, the decision to file either a Federal Form 1120 or Form 1120-H has largely revolved around the tax rate differential. Form 1120-H carries with it a flat tax rate of 30 percent, while Form 1120 uses the graduated rate schedule that applies to corporations, and in most cases the 15 percent tax rate will apply. So, as you can see, the Federal tax rate with the 1120-H is double that of the 1120 (30 percent vs. 15 percent). As a result of this differential, many condominiums with significant amounts of interest income have historically found it advantageous to file the 1120. The new condominium tax law in Massachusetts has significantly changed the decision-making process between the Form 1120 and Form 1120-H. Federal Form 1120-H Form 1120-H is a federal tax return specifically designed for most homeowner associations other than cooperatives. The filing of Form 1120-H is elective — it is an annual election, and the election is simply made by the timely filing of an 1120-H form. There are various qualification tests that must be met in order to qualify to file an 1120-H, but given the nature of most associations in Massachusetts, only a small handful of associations will fail to meet the qualification tests. The qualification test that creates the most problems for Massachusetts condominiums is the “residential test,” which requires that at least 85 percent of the total square footage of the association must be residential. Mixed-use associations require a careful analysis of square footage to test for qualification, and commercial condominiums simply do not qualify to file Form 1120-H. If an association qualifies to file an 1120-H and properly elects to do so, CONDO MEDIA • MARCH 2010
Condo Media - March 2010

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