Tax season is upon us, and if you are new to filing taxes with your HOA, you may have many questions about which forms need to be filed, whether you are tax exempt, and what to do if your HOA has not filed in a couple of years. In this post, we will answer some of the most commonly asked questions regarding taxes in your HOA.
Does my HOA have to file taxes?
Homeowners associations can be tricky because they can be viewed as nonprofit organizations by the state. However, almost every HOA is required by the federal government as corporations. This means that most HOAs have to pay taxes to the IRS even if they are listed as a nonprofit through the state.
As with most things, there are exceptions. Some HOAs may be recognized by the IRS as a nonprofit if it has registered as such and been approved. This is a rare case, however, and is obtained only by filing Form 1024 and using tax code section 501(c)(4).
What forms should I file?
Most HOAs have to file Form 1120 in their tax returns. This form can be an arduous form to fill out with several pages to fill out and a large amount of information required. There are other drawbacks to this form as well, as any money left unspent at the end of the year is subject to being taxed and the treasurer of the board has an added work load with this form as money must be set aside by them throughout the year.
Any HOA filing Form 1120 should be meticulous about record-keeping throughout the year to make gathering the information needed and paying these taxes as easy as possible.
Is there a way to get out of filing form 1120?
Because of the time-consuming nature of Form 1120, many HOAs are eager to bypass this form. Certain homeowners associations may have this option if more than 60% of the annual income of the association comes from sources such as membership dues, fees and interest, or special assessments. Also, 90% or more of these funds must be used towards the maintenance or addition of the property itself. If these two requirements are met, the HOA can utilize section 528 of the tax code and file Form 1120-H instead.
What if my HOA has failed to file tax returns?
If it has been several years since your HOA has filed the appropriate tax returns, there are several steps that you should immediately take. First, find the most recent tax return to determine how long it has been since your HOA filed. Second, fill out the most recent tax return in a timely fashion. Third, contact the IRS to determine whether it is possible to file a Form 1120-H for the missed years. Fourth, file all of the tax returns that were missed in previous years.
Tax season can be a stressful time, but if you have been faithful about keeping records and filing your 1120-H on time, your association will come through the season intact.