HOA Taxes: The Dos and Don’ts
The beginning of the year marks a time when a board of directors can reset and restart with new goals and plans for the future of their homeowners’ association (HOA). With that comes a responsibility to tackle a big financial priority: taxes. Even though you might be able to easily complete your own personal taxes, HOA taxes can get complicated. We’re here to help! Read on to learn what to do—and what not to do—when it comes to your association’s taxes.
DO: File your HOA taxes.
For federal tax purposes, an HOA is considered a business. While you're a non-profit, you still need to file taxes as any other corporation would. However, just because filing a tax return is mandatory for your HOA, it doesn’t necessarily mean you’ll owe any tax.
DON’T: Assume your HOA is tax-exempt.
According to the Internal Revenue Service (IRS), for an HOA to be tax-exempt, the association must prove it doesn’t perform exterior maintenance for privately-owned homes and that the land it owns and maintains is available for public use. It’s very rare for any HOA to have tax-exempt status, even if it’s set up as a non-profit. It’s best to check with an association certified public accountant (CPA) for clarification.
DO: Know when your taxes are due.
Your HOA usually must file its taxes on or before the 15th day of the fourth month after the end of your HOA's tax year—typically April 15 for most associations. However, if your association’s fiscal year ends on June 30, you must file on the 15th day of the third month after the end of the tax year. Check the IRS website for specific details about your due date, extensions, and how to submit your tax forms.
DON’T: Wait until it’s too late.
HOA taxes aren’t as cut-and-dry as you might think, and there are several factors that may delay the process of filing yours. It’s best to get an early start to meet the tax filing deadline. Missing your due date may have costly consequences—penalties and interest on money due stack up the longer you wait. The good news is that you can file an extension, which can give you approximately six more months to submit your forms. As always, consult a professional for assistance.
DO: Hire a CPA with HOA experience.
It’s essential to find a CPA that has experience with HOAs, as not all do. Relying on a qualified and experienced CPA to handle your HOA taxes will save your board time, energy, and money. Your CPA will be able to advise on the IRS forms best suited for your HOA, identify exempt and non-exempt income, and expertly manage the calculations and requirements of submitted paperwork.
DON’T: Go at it alone.
Your HOA’s treasurer is responsible for the association funds and maintaining all the board’s financial records. While the treasurer can choose to prepare and file the HOA’s tax return on their own, it's recommended you outsource this task to an accounting partner. Association taxes are unique and require a specialized understanding of HOA financials that an accounting professional may be better equipped to handle. When your HOA partners with a CPA, the treasurer should be the liaison during the process and confirm all forms are filed on time to avoid penalties.
DO: Complete the proper IRS tax form for your association.
Your HOA can either file Form 1120, U.S. Corporation Income Tax Return, or Form 1120-H, U.S. Income Tax Return for Homeowners Associations.
U.S. corporations use Form 1120 to determine their income tax liability and report their income, losses, gains, credits, and deductions to the IRS. Form 1120-H is a tax form specifically for HOAs. Form 1120-H is more straightforward than Form 1120 and offers additional tax benefits for HOAs. With Form 1120-H, exempt-function income—like dues, fees, and assessments from owners–can be excluded from your HOA’s gross income.
Just like your personal taxes, you’re not committed to filing with the same form year after year. You can compare each form and file the one with the lowest tax.
DON’T: Forget your state may have tax filing forms, too.
Each state is unique and may have different filing requirements. While some states don’t require a tax return, others do—and form requirements in one state may be more complex than those in a neighboring state.
Board Tips for Setting HOA Goals
It’s important to have a plan in place to complete your association’s taxes on time, but there are several other items your board should be planning for annually, like reviewing the governing documents, preparing the budget, managing assessments, and scheduling audits. Creating goals can provide a roadmap to ensure you’re responsibly maintaining your association. Goals help keep you on track, accountable, and financially sound. Read our article, “Board Tips for Setting HOA Goals,” for expert tips on the goal-setting process.