Income Taxes. Associations are NOT tax exempt. Even though associations are nonprofit mutual benefit corporations, they must file tax returns and, if necessary, pay taxes. (Internal Rev. Code 528). Failure to file returns could result in penalties, back taxes and interest. Each year associations must choose one of the following filing forms:

Federal Form 1120. This is a regular corporate filing with a 15% tax rate on the first $50,000 of taxable income. The return is more difficult to prepare and requires associations to use more restrictive accounting procedures during the year. It also has a higher audit risk.

Federal Form 1120-H. This is designed specifically for associations and is an easier form with a 30% tax rate on all non-dues income (interest earnings, laundry income, rental income, etc.). It has a lower audit risk.

Property Taxes. Most associations are not required to pay property taxes since most real property is owned in common by the membership, which means each owners pay their share of common area property taxes through the increased value of their own property attributable to the common areas.