Contrary to what some may believe, homeowners associations do have to file tax returns. The process can be confusing, especially for a new association with little to no experience in the tax arena. To help you out, here is everything you must know about HOA tax returns.
In this article:
Are HOA Tax Returns Necessary?
If a homeowners association is created as a non-profit organization in its home state, then it is treated as such on a state level. However, on a federal level, homeowners associations are considered corporations. And, just like corporations, HOAs do need to file tax returns, even if the state lists them as non-profits.
The federal government recognizes a handful of HOAs as non-profit organizations, and you can follow their suit, too. It will require registration and approval with the Internal Revenue Services (IRS). You can do this by filing Form 1024 under the tax code section 501(c)(4). It is important to note, though, that filing this form can cost a lot of money, and not all HOAs obtain the recognition even after going through the long process. Additionally, even HOAs that achieve this recognition must still file a tax return.
Homeowners Association Tax Return Forms
When it comes to filing an income tax return for homeowners associations, there are two forms that you can use.
The first is Form 1120, also known as the Corporation Income Tax Return form. This is the form traditional corporations typically use. The second is Form 1120-H, which is a variation of the standard form specifically created for community and homeowners associations.
Many associations prefer filing Form 1120-H over Form 1120 for a number of reasons. The first and foremost reason is due to the arduous process involved with filing Form 1120. This form demands a heavy load of information and a great level of detail.
Because HOAs do not utilize advanced bookkeeping techniques, providing all the required information can be burdensome. Moreover, filing Form 1120 means that any leftover income, even those in your reserves, is taxable for that year.
Keep in mind that these two forms, while in many ways different, are not mutually exclusive. That means you can choose to file either form, provided you have the information required. So, if your association has been filing Form 1120 in the past years, it is easy to make a transition to using Form 1120-H instead.
Filing Form 1120 H
Form 1120-H is a popular choice among many homeowners associations because it poses some tax benefits. For instance, filing this form means your HOA can exclude exempt function income from your gross income. That means you must only pay taxes on non-exempt income.
If your HOA qualifies, if any income directly contributed to the generation of non-exempt income, that income becomes deductible. However, you must produce records to support these deductions. Furthermore, it is much simpler to fill out Form 1120-H, only one-page long, and it involves no estimated tax payments for your HOA treasurer to handle.
Under section 528 of the tax code, a homeowners association can file Form 1120-H if it meets the following requirements:
- 60% of the association’s annual income is obtained from assessments (membership dues and special assessments), fees, and interest
- At least 90% of the association’s funds go to maintenance or property additions
You can calculate the amount of your association’s tax by deducting $100 from your non-exempt income. Then, you will subject the rest of your non-exempt income to a flat rate of 30%.
HOA Tax Exemptions: Understanding Exempt and Non-exempt Income
Before you can file your HOA tax returns, it is important to know the difference between the two main types of income: exempt function income and non-exempt function income. This way, you will not use the two interchangeably and risk making a mess on your HOA tax return.
Exempt function income, or simply exempt income, comes from sources such as membership dues, special assessments, fees, and interest on fees. This revenue must come from the association’s members distinctly as owners and not as customers.
Non-exempt income, on the other hand, is the income the association earned as a result of services provided to either community members or the general public. This includes revenue earned from laundry services, vending machines, and renting out clubhouses, pools, and other facilities. Because this income is, by definition, not exempt, it is typically taxable. There may be exceptions, though your association will need to consult with a professional as this varies on a case to case basis.
When to File HOA Tax Returns
The deadline to file your HOA tax returns falls on the 15th day of the 4th month following the conclusion of its tax year.
Though, if your association’s tax year ends on June 30, you must accomplish and file your tax form by the 3rd month’s 15th day following the conclusion of your tax year. If you have a short tax year that ends on any day in June, the IRS will consider your fiscal year ending on June 30.
It is normal to encounter difficulties with filing your HOA tax returns. You may not understand some terms or lack sufficient information to accomplish your tax forms on time. If you feel as though you will not meet the deadline, you can file for an extension using Form 7004. This will give you an extension of six months.
Consider Getting Professional Help
It is important to keep clean and comprehensive books to make tax filing much easier for your association. However, not all HOAs have the necessary experience or expertise to maintain accounting records or navigate the complicated world of tax returns.
Instead of trying to figure things out on your own, it is considerably more beneficial and efficient to hire a professional to help. You can turn to a Certified Public Accountant (CPA) or an HOA management company for such services.
Getting the Lowest Tax for Your HOA
When filing HOA tax returns, homeowners associations will naturally want to use the form that offers the most benefits. Many HOAs prefer filing Form 1120-H over Form 1120, while others find that the latter works better for them. If your HOA does not know which form to file, consider computing your taxes using both forms and then filing the one that results in the lowest tax.
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