Your responsibilities as a homeowners’ association (HOA) board member may fluctuate from time to time, but one constant you can count on year after year is taxes. While filing taxes for your association is an essential part of running the HOA and keeping your accounting on track, you may have many questions regarding the process and eligibility. Luckily, with more than 43 years of experience in assisting managed communities with their taxes, we have answers. Read on to find answers to seven frequently asked questions about HOA taxes.
1. Does my HOA have to file taxes?
To put it simply, yes, every HOA must file taxes at the end of the fiscal year. Although your HOA may be recognized as a not-for-profit organization by your state, in the eyes of the Internal Revenue Service (IRS) and the U.S. federal government, an HOA is considered a corporation and must file taxes according to corporate tax rules.
On some occasions, an HOA may fall into the category of a registered and approved nonprofit. To qualify, an HOA must submit a substantial amount of paperwork, including Form 1024, and go through a lengthy approval process. Check with your association’s Certified Public Accountant (CPA) to confirm your exemption status.
2. When are HOA taxes due?
As with all other nonprofit corporations, an HOA is required to file taxes following the end of its fiscal year. If the fiscal year’s end for your HOA is December 31st, you have until the 15th day of the fourth month after the end of the fiscal year. According to the IRS, that date is April 15th.
However, not all HOAs end their fiscal year on December 31st. Some HOAs end their fiscal year in June. In those instances, it’s considered a short tax year by the IRS, and you must file taxes by the 15th day of the third month following the end of your fiscal year.
For deadlines that fall on a weekend or holiday, the tax filing cutoff date will be the next business day. If you anticipate needing more time to file taxes, you’ll need to file an extension to get an extra six months. Visit the IRS website for specific instructions.
3. What forms do HOAs use for filing taxes?
In general, you’ll either use Form 1120 or Form 1120-H to file your HOA’s taxes. Most associations will use the corporate tax return Form 1120, which can be complex and requires in-depth financial details. However, some HOAs may qualify to file the simplified Form 1120-H if they meet certain requirements.
If you’re using IRS Form 1120 to file your HOA taxes, here’s what you need to know:
- There is a lower tax rate of 15% on the first $50,000 of the association’s net income.
- All HOA net income is subject to taxation.
- The form requires detailed financial information that can be difficult to understand without an accounting professional’s help.
It’s vital to keep financial records organized and up to date throughout the year. That way, the information will be easier to find when you need it.
Your association may be able to file Form 1120-H if it meets all these qualifications:
- HOA members provided 60% of the association’s revenue through assessments, late fees, or interest.
- At least 90% of HOA expenses were for association operations and maintenance.
- At least 85% of the association’s homes or units are residential.
- The HOA’s residual income for the year was not spent for the purpose of benefiting community members.
While Form 1120-H is easier to complete and provides some perks, such as only having to pay taxes on non-exempt income, the tax rate is higher at 30%. Work with your HOA’s CPA and management professionals to determine which form is best for your association.
4. Who’s responsible for handling HOA taxes?
Your association’s treasurer is typically responsible for overseeing HOA financial matters, but that doesn’t mean they have to—or should—handle taxes alone. All board members should have a good grasp of their HOA’s records, budgets, and finances. In addition, it’s a good idea to work with a CPA who specializes in HOA accounting to avoid potential mistakes or miss out on benefits.
5. What happens if my HOA forgets to file taxes?
If your association has fallen behind on filing taxes, take steps to get back on track. You’ll need to file taxes for the most recent fiscal year by the deadline—and complete tax returns for any missed years. In these situations, the process can be a huge undertaking and will most likely require professional help.
6. Are there any state tax requirements for HOAs?
Whether your HOA must pay state taxes will depend on the laws of your state. Every state is different, so check your state’s tax laws to determine if you must file a state tax return in addition to your federal taxes.
7. Does my HOA qualify for any tax exemptions?
It’s possible for your association to qualify for an exemption as a social welfare organization if the HOA maintains community common areas that are open to the public, including streets and sidewalks. However, you’re required to provide the IRS with detailed evidence. You must also apply for federal tax exemption by qualifying for 501(c)(4) or 501(c)(7) status. Just keep in mind that it isn’t common for HOAs to achieve exemption this way.
Finding the Right CPA for Your HOA Taxes
When you need help filing taxes for your association, it’s essential to work with an experienced CPA who understands the unique requirements of HOA accounting and tax laws. Check out our article, “How to Find the Right CPA for Your HOA,” to learn what to look for in a CPA.