Are homeowners associations tax exempt?

Homeowners associations are not automatically exempt from filing federal income taxes just because they operate as non-profits. In many cases, HOAs still need to file a tax return, though they may receive special tax treatment for certain exempt function income.

Which tax forms do HOAs use?

HOAs commonly use Form 1120 or Form 1120H. Form 1120 is more detailed and generally requires more accounting knowledge, while Form 1120H is often easier to file but has eligibility requirements under Section 528 of the Internal Revenue Code.

What is exempt function income for an HOA?

Exempt function income generally refers to funds collected from HOA members, such as regular assessments, special assessments, HOA dues, and other payments made by homeowners as part of their membership obligations.

What is non-exempt HOA income?

Non-exempt HOA income typically comes from revenue outside regular member obligations. Examples can include clubhouse rental fees, income from community-owned laundry or vending facilities, dividends, and rental income.

Everything the Board Needs to Know About HOA Taxes

Q: What are HOA taxes?

HOA taxes refer to the tax obligations that homeowners associations must file, similar to other organizations and businesses. When filing taxes, an HOA may need to submit records of its income, expenses, deductions, and exemptions.

Q: When are HOA taxes due?

The deadline depends on the HOA’s fiscal year. Many HOAs with a fiscal year ending on December 31 must file federal tax returns by April 15, while associations with other fiscal year-end dates generally file three-and-a-half months after the fiscal year ends.

Taxes are obligations that everyone has to the government, including organizations such as homeowners’ associations. Many board members may be intimidated by the process, but knowing what to prepare for when it comes to HOA taxes can lessen the stress.

What are HOA Taxes?

HOA taxes are basically the taxes that your homeowners association will need to file, similar to other organizations and businesses. When filing taxes, your HOA may need to submit records for the community’s income and expenses, as well as the tax deductions and exemptions that may apply.

New HOA board members may not know that the association is required to file taxes. Many of them assume that, since HOAs operate as a non-profit, they’re automatically exempt from taxes. However, this doesn’t automatically exempt it from filing federal income taxes. Many times, HOAs still need to file a tax return according to IRS regulations that apply to them.

Fortunately, most HOAs receive special treatment when filing taxes. In many cases, HOAs can separate something called “function income” from the gross income it gets when filing. That function income is exempt from tax calculations as it generally funds the HOA’s operations.

Nevertheless, even if you don’t owe the government anything by being tax-exempt, the association still needs to file its taxes.

HOA Tax Forms You Need to Know

Tax filing season is a stressful time for anybody, including HOA board members. That stress usually comes from not knowing what to do. To help with the situation, HOA board members need to know the tax forms they may need to file for the association.

Here are the two types you should know about.

Form 1120

Although tedious, the majority of HOAs in the country file Form 1120 with the IRS. This form requires HOA boards to provide a lot of information about the association and requires more advanced accounting knowledge to complete.

Using this form has both benefits and drawbacks.

One such benefit is that HOAs that file this form can qualify for a 15% tax rate on the first $50,000 of their net income. However, with that, the entire HOA’s net income is subject to taxation, including any money you didn’t use at the end of a fiscal period.

Form 1120H

HOAs may also use Form 1120H as an alternative under section 528 of the Internal Revenue Code (IRC). Compared to Form 1120, this one is easier to complete.

However, do know that not all HOAs are eligible to use this form. It needs to check some qualifications, including:

Having 60% of the HOA’s income must come from HOA members (i.e., revenue from HOA fees and assessments, penalties, and late fees.
Having 90% of HOA expenses going to community maintenance and operations.
85% of your HOA community must be residential.
Your HOA’s yearly residual income must not be used up for the benefit of HOA members.

Other than being easier to file, Form 1120H also gives HOAs the benefit of not including exempt function income from the gross income calculation. This means your taxes are based only on non-exempt income, such as rentals and dividends.

Exempt vs. Non-Exempt HOA Income

Knowing the difference between exempt and non-exempt HOA income is crucial to planning for HOA taxes. Here’s where they differ:

Exempt Function Income: This type of income refers to funds collected from HOA members. Usually, these come from regular and special assessments, HOA dues, and other payments made by homeowners in the community.
Non-Exempt Income: This type of revenue refers to money from payments made by homeowners outside their obligations as HOA members. It also comes from other revenue-making activities by the HOA. Some sources of this type of income include clubhouse rental fees, community-owned laundry or vending machine facilities, HOA dividends, and rental income, among others.

What Do HOAs Need When Filing HOA Taxes?

When preparing to file your forms, HOA board members should also gather the necessary information. The following documents include:

Income Statements and Balance Sheets: These documents indicate the HOA’s overall financial activity and health.
Bank Statements: These are used to verify the flow of funds within the HOA, including income and expenses.
Reserve Fund Information: This shows the state of the HOA’s reserve account.
Annual Budget: This provides context for how the HOA collects and uses money.
Service Invoices, Receipts, and Contracts: These serve as supporting documents when checking the HOA’s expenses.

Should You Hire a CPA with HOA Experience?

Yes. When preparing to file taxes, your association will benefit from hiring a CPA who specializes in HOA taxes. This ensures that they have the right knowledge to help you with your taxes. It also saves your association the time and energy that come with tax season.

Having a CPA around can provide your HOA board with guidance on what’s the best type of tax for your HOA. The accountant will also help you identify which income is exempt or non-exempt and provide accurate calculations when completing your forms.

To make it easier for your board members, you can also hire an HOA management company if you haven’t already. Professional managers can help by ensuring all required documents are accounted for and ready when the CPA needs them.

When Are HOA Taxes Due?

The deadline for filing your annual HOA taxes would depend on when your association ends its fiscal year.

Many HOAs end their fiscal year on December 31. For these, they must file their federal tax returns on or before April 15.

Meanwhile, HOAs with fiscal years ending on June 30 or on any other date have a different deadline. They are required to file their annual tax returns three-and-a-half months after their fiscal year ends.

Depending on the HOA, your requirements, estimated tax payments, filing deadlines, and possible extensions may vary. Because of this, try to work with professionals who can help you file them correctly and on time. If you miss your deadline, even if your association is tax-exempt, it may result in unnecessary penalties from the IRS.

Fulfilling Your HOA’s Obligations

The right knowledge and preparation for filing HOA taxes make the process a bit easier for HOA board members. Combine this with help from certified professionals and HOA managers, and tax season will be a breeze every year.

HOA Explore offers a convenient way for community associations to find support from the right professional HOA management company. Use our online directory today!