Published on: July 1, 2009
As summer begins we are sure that the farthest thing from your mind is tax season – however, recent changes to Massachusetts tax policy will have a sweeping affect on condominium and homeowners associations.
On July 3, 2008, the Governor signed into law An Act Relative to Tax Fairness and Business Competitiveness (the “Act”). This law includes major corporate tax reform provisions. Included in these reforms are new “check the box” entity classification rules. Previously, business entities, including condominiums, could have different classifications for federal and state tax purposes. The Act eliminates these differences, and for tax years beginning on or after January 1, 2009, the filing status for condominiums in Massachusetts must conform to their filing status for federal tax purposes.
At the federal level, all condominiums, including unincorporated condominiums file a corporate tax return. However, the Federal Tax Code recognizes that although condominiums file corporate tax returns, corporate tax law principles do not apply to condominiums. A condominium files either a Form 1120 as a member organization or a Form 1120H as a homeowners’ association. Whether choosing to file a Form 1120 or a Form 1120H, condominiums are afforded certain protections and exemption under Section 277 or 528, respectively, of the Internal Revenue Code which eliminates and/or limits tax implications with regard to “income” in the form of excess common area fees and net worth. While condominiums must file federal corporate tax returns, they are not taxed as true corporations. But now, in Massachusetts, since condominiums file corporate tax returns at the federal level, they will be taxed as corporations at the state level – and possibly subject to a new corporate tax.
We are working with CAI member Kenneth Bloom in seeking further guidance from the Massachusetts Department of Revenue as to the full extent of these changes on condominiums. However, we have been able to determine the following possible implications:
- All condominiums will now be subject to the minimum corporate tax of $456.
- All condominiums will now have to file state Form 355 – this is a significantly more detailed form than the previous Form 3M.
- As it pertains to taxable income, which is generally interest income, the rate on the old Form 3M was 5.3%, but on Form 355 the new tax rate is 9.5%.
- The new forms must generally be filed electronically.
Perhaps the biggest impact could be that funds maintained in operating and reserve accounts could be included in the calculation of net worth, thus subject to additional tax. For those condominiums maintaining large reserve accounts, this could be a major impact.
As we continue to review these changes, and work with DOR to determine the impact on condominiums, we will provide additional information in the coming months.
If you have any questions as to how these changes might impact your association please do not hesitate to contact our office for more information. You may also view additional information on this topic on MEEB’s website by clicking on the following links: