Federal Taxes for Community Associations: What Every Board Should Understand

Federal taxes are one of the most misunderstood responsibilities of community association boards. Many board members assume taxes are “handled by the CPA” and never think about them again, until an unexpected tax bill or IRS question shows up. The reality is that informed boards make better tax decisions, reduce risk, and avoid costly surprises.

This article breaks down the basics every HOA and condo board should know, without accounting jargon.

Why Community Association Taxes Are Different

Community associations are nonprofit corporations, but that does not mean they are tax-exempt. Associations still file federal tax returns every year and may owe taxes depending on how income is earned and reported.

The most important thing for boards to understand is that not all income is treated the same. Membership dues are generally protected, while other income, such as interest, rentals, easements, or settlements can become taxable.

Form 1120 vs. Form 1120-H: The Big Decision

Most associations file one of two federal tax forms:

• Form 1120-H – Often preferred because it offers simplicity, predictability, and protection of membership income.

• Form 1120 – Sometimes chosen strategically when taxable income is high and deductible expenses can offset it.

Neither option is “right” or “wrong” by default. The key is understanding why one form is being used in a given year and whether it aligns with the association’s income structure and risk tolerance.

Boards should always be able to answer one question:

Why did we choose this tax form this year?

Taxable Income: Where Boards Get Caught Off Guard

Taxable income commonly comes from:

• Interest or investment income

• Easements, cell towers, or utility agreements

• Rental income (clubhouses, guest suites)

• Settlements or eminent domain proceeds

Receiving income is not the problem. Failing to understand how it’s taxed is.

Why Proper Expense Allocation Matters

When an association earns taxable income, the IRS allows deductions, but only for expenses directly related to producing or restoring that income.

For example:

• If an association receives money from eminent domain, the portion tied to land loss is treated differently than funds used to restore damaged assets.

• If income comes from rentals or easements, only expenses tied to those activities are deductible, not general operating costs.

A simple rule boards can remember:

If the expense would not exist but for the income, it may be deductible.

Proper allocation isn’t about pushing the limits, it’s about defensibility.

The Board’s Role (Even With a CPA)

CPAs prepare returns, but boards are responsible for decisions. Strong boards:

• Understand where taxable income comes from

• Ask why a tax form is being used

• Ensure income and expenses are properly categorized

• Focus on risk management, not loopholes

You don’t need to be a tax expert, you need to be an informed fiduciary.

Education Beats Surprises

Federal tax issues are easiest to manage when boards understand them before decisions are made. That’s why we focus on education, coaching, and simple frameworks that help boards ask better questions and stay out of trouble.

If your board wants clarity, confidence, and fewer financial surprises, tax education isn’t optional, it’s essential.

Interested in deeper training for your board or treasurer? Our Federal Taxes coaching is designed specifically for community associations and built for real-world board decision-making.