Does an HOA pay taxes? It’s a common question a lot of homeowners associations ask. While an HOA does not technically operate to gain profit, it is still bound by tax laws. But, how exactly does it all work? Do HOAs have to file tax returns? Are HOA dues tax deductible? Here’s your complete HOA tax guide.
Does an HOA Pay Taxes? Let’s Find Out
Almost everyone in the homeowners association and those in the industry always asks the same question. Unfortunately, there are many forms of taxes and lots of regulations that make that a rather complicated question to answer.
Do HOA’s file tax returns? Under the eyes of federal tax laws, homeowners associations fall under the category of corporations. So, even though your HOA is not-for-profit, it must still follow corporate rules when it comes to taxes. Following this logic, the short answer to the question, “Does an HOA pay taxes?” is yes.
There is a rare exception to this rule, though. If your HOA registers as a non-profit with the IRS and subsequently accepted as such, you don’t fall under this category. Keep in mind that filing for such recognition requires a ton of work and involves Form 1024.
What Tax Forms Do You Need?
Homeowner association tax time can be a stressful period for many HOA boards. Knowing which forms you must file, though, can make the process easier. When it comes to HOA taxes, there are two forms you must take into account: Form 1120 and Form 1120-H. So, what is the difference between these two forms? Let’s break them down below:
1. Form 1120
Most homeowners associations file Form 1120 with the IRS, though it involves a great deal of work. It also requires a ton of important information to fill out. There are both pros and cons to using this form.
For instance, HOAs that file this form experience a lower tax rate (15%) for the first $50,000 of net income. On the downside, though, it subjects all of your association’s net income to taxation. That means any unused money at the end of the period gets taxed as well. Additionally, accomplishing this form calls for more advanced accounting knowledge.
2. Form 1120-H
If you dislike Form 1120, under section 528 of the IRC, you can choose to file Form 1120H instead. It is significantly easier to accomplish, though it does come with homeowners association tax filing requirements. Your HOA can only file this form if it fits the following qualifications:
- 60% of your revenue must have come from the association’s members (regular and special assessments, interest, late fees, etc.)
- 90% of your expenses must have gone to operations and maintenance
- 85% of units in your association must be residential
- The annual residual income must not be spent for the benefit of the community members
In comparison to Form 1120, IRS Form 1120 H has one noticeable benefit. When you file this form, your HOA can choose not to include exempt function income from your gross income. That means your HOA must only pay taxes on non-exempt income. Some examples of non-exempt income include rental income and dividends.
If your community has vending machines in various places, income earned from those is also considered non-exempt. Make sure to include supporting documents, though, to signify these as non-exempt income. Some examples of 1120-H deductible expenses include maintenance costs and cleaning costs.
The Case for Rollovers
If by the end of the year, you find that your HOA earned more money than usual, you can choose to roll it over to the next year. That effectively allows you to delay or altogether avoid paying taxes on that extra income. To roll income over, most associations require a board vote, though it is best to check your own governing documents for the process.
By rolling your income over to the following year, you can take advantage of the Ruling 70-604. Under this ruling, the IRS will consider the rollover as a constructive return of capital to association members. Aside from avoiding taxes, another benefit of a rollover is compensation. If in the future, your HOA makes less money than anticipated, you can use the rolled over income to make up for the losses. In fact, you can even do this process over and over again forever.
What About State Taxes?
Does an HOA have to file a tax return? When it comes to state taxes, the laws differ from state to state. Your HOA may need to file a state homeowners association tax return depending on the location you are in.
For instance, HOAs need to file tax returns and pay taxes in Massachusetts. To determine whether your HOA needs to pay state taxes, it is best to check with a CPA. Your HOA accountant can also help with filing federal HOA tax returns.
When Should an HOA Pay Taxes?
For non-profit corporations, the deadline for filing federal tax returns is 75 days after the end of their fiscal year. Most HOAs have a fiscal end date of December 31, the last day of the year. In that case, the deadline falls on the 15th of March.
Make sure to prepare all the required documentation during those 75 days so that you don’t miss the deadline. If you expect to go beyond the due date, you can file for an extension for free. In fact, most associations automatically file for an extension because 75 days usually aren’t enough to make all the necessary preparations. An extension gives you an extra 6 months to file. Ask your Certified Public Accountant (CPA) to file for an extension on your association’s behalf.
If your HOA never filed a tax return or has missed paying homeowner association taxes for the past few years, don’t worry. It is not too late. The first thing you should do is check how many years have passed since your last filing. Then, get in touch with the IRS to see whether you can file a Form 1120-H for the years you missed. If they say yes, immediately accomplish the forms for the missed years. On the other hand, if they say no, see what else you can do to remedy the situation.
Frequently Asked Questions
Here are the answers to commonly asked questions such as, “Are HOAs nonprofit?” and “Does HOA pay property taxes?” and “Are HOA fees tax deductible?”
Do HOAs file tax returns?
To reiterate, homeowners associations are considered corporations, which means they do need to file federal tax returns. Such HOAs can use either Form 1120 or Form 1120-H when filing their taxes. But, when it comes to state tax returns, the law can vary.
Is an HOA a corporation?
Yes. In the eyes of the law, homeowners associations are corporations.
Are homeowners associations nonprofit?
Homeowners associations are, by default, generally regarded as non-profit. But, that does not mean HOAs are tax-exempt. So, instead of asking, “Is an HOA a nonprofit,” you should ask whether or not you are tax-exempt.
Are HOAs tax-exempt?
Generally speaking, homeowners associations are tax-exempt. But, an HOA can apply for both federal and state income tax exemption. To qualify for federal tax exemption, an HOA would need to achieve 501(c)(4) or 501(c)(7) status. The process, though, is very difficult. Plus, it is rare for associations to achieve either status. State laws on tax exemption status can vary, so you should check your state’s requirements for qualification.
Are homeowners association fees tax deductible?
Generally, HOA dues are not tax-deductible if you use your property as a home year-round. But, there are some exceptions. You can reach HOA fees tax-deductible status if you rent out your property, either year-round or for a specific portion of the year. Similarly, you can reach homeowner association fees deductible status if you use your property for a business.
Do HOAs pay property taxes?
The answer to this isn’t quite simple. It depends on the nature or type of your homeowners association. Different states also have varying laws when it comes to property taxes. In California, for instance, HOAs typically don’t pay property taxes, though there may be other district taxes such as parcel taxes and library taxes.
Do condo associations pay property taxes?
Generally, condo associations pay property taxes of the common areas. Individual unit owners then shoulder the cost of their own real property tax.
Do HOA fees cover property taxes?
Monthly HOA dues cover a lot of things such as maintenance costs, management fees, landscaping costs, insurance premiums, and other expenses. But, for most planned communities, HOA dues do not cover individual homeowner property taxes.
Must a Homeowners Association Pay Taxes?
Should an HOA pay taxes? Yes, of course. While many associations perceive HOA tax filing as a headache, the opposite is likelier.
Most HOAs don’t even need to pay anything because a majority don’t earn large incomes. You do, however, still need to file tax returns. Approach tax time systematically, first by determining whether to file for an extension and then selecting which form to file.
If your HOA is having trouble with taxes, consider enlisting the help of an HOA management company. Start looking for the best HOA management company in your area today using our online directory.
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