Benjamin Franklin said it best… “In this world nothing can be certain, except death and taxes.” Taxes are a certainty for individuals and corporations - including homeowners’ associations. The good news is that HOAs should pay very little, if any, annual taxes.
Because homeowners associations are unique, the IRS has created a special set of rules just for HOAs in Section 528 of the tax code. Every HOA has specific tax needs. So, the most important tax advice we can give you is to use this article to help ask the right questions of a tax professional. Better yet, find one that specializes in HOA taxes and planning.
Here are the top 5 HOA tax filing questions answered.
1. Is HOA revenue exempt from being taxed?
Most HOAs bring in just enough money to pay their expenses and fund reserves through member assessments or dues (see our article on Balanced HOA Budgets). Thankfully, Section 528 considers this revenue exempt, which means it’s not taxable. However, there may be some revenue categories that are taxable, such as if your HOA:
- Earns interest income on reserve funds
- Has capital gains from the sale of any property
- Has rental income or user fees, such as the clubhouse, golf course or HOA-owned properties
- Leases out any of the property for things like cable service or a cell tower
Careful attention to these and other details are important. For example, if an HOA-owned golf course is open to the public, non-resident green fees are generally considered non-exempt revenue.
2. Are expenses deductible?
Yes, like any other corporation, most HOA expenses offset revenue. Operating budget items, including common area maintenance and management overhead costs, are deductible. Depending on the filing form used (see answer #3), reserve budget items like component repairs and replacements also offset revenue. Deductible expenses include the cost of having a tax accountant prepare them for you, which is a good reason not to do it yourself.
3. What form is used for filing HOA taxes?
Another good reason to use a tax professional familiar with HOAs, is knowing the correct IRS form to file. Two form options are available to HOAs—IRS Tax form 1120 for corporations, or 1120-H specifically for HOAs. The latter is most likely the best, with a lower risk of audit. It’s a relatively simple one-page form. However, there are qualifications to be met before it can be used. Among them, 60% of HOA revenue must come from assessments or dues. And at least 90% of the expenditures must relate directly to operation of the association.
Deductible expenses include the cost of having a tax accountant prepare them for you, which is a good reason not to do it yourself!
4. When does an HOA need to file taxes? If the association’s fiscal year follows the calendar year, taxes are due on March 15th. For all other HOAs, taxes are due the 15th day, following the 3rd month of the end of the fiscal year. For example, a fiscal year ending May 31st, would establish an annual tax deadline of September 15th. Of course, your tax professional is going to need time to prepare. The better organized your bookkeeping, the less time he or she will need to complete you tax filing.
5. What if the HOA has not filed required tax forms? The consequences of not filing taxes could have serious impacts for the HOA to function. Penalties, late fees, and interest can accumulate quickly. Under some state laws, an HOA can eventually lose its corporate status, preventing it from managing its business matters.
There’s good news, even in this case: an extension can be requested for the current year. For past years’ unfiled taxes, the IRS is usually willing to accept reasonable reasons for missed filings and payments to bring the HOA current. If ever it was needed, hiring a professional tax advisor is essential in this situation. He or she will need all the bookkeeping records for the affected tax year(s) as possible. This includes all communication to and from the IRS. You can find more help with unfiled taxes at the Taxpayer Advocate Service or download this IRS publication to learn about taxpayer rights.
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