In this post we will look specifically at the Arizona HOA tax return filing requirements. We have talked extensively about the tax requirements of HOAs. But often omitted from any tax discussion is the state filing requirements for HOAs.
This is a big area of complexity as each state is different. In fact, some states don’t require any filing at all. But before we dive in to the Arizona requirements, let’s take a look at what qualifies as an HOA in Arizona from a tax perspective.
An HOA has two options when it comes to filing a tax return. One option is to file as a corporation (that is a C-Corporation and NOT an S-Corporation). The other option is to file under Section 528 of the Internal Revenue Code (the “IRC”).
Most HOAs choose the second option. This is because under IRC Section 528 if almost all the income received is from assessments and substantially all of the expenses are for maintaining and caring for association property, there is no tax liability.
But first the HOA has to qualify under IRC 528. There are several criteria that must be met to file form 1120-H under IRC 528:
- At least 85% of the units must be used as residences.
- A minimum of 60% of the association’s gross income must be received from owners in their capacity as HOA members and and NOT as customers of goods or services.
- At least 90% of the HOA’s expenses must be for operating and capital expenses that relate to the HOA’s exempt function.
- Any residual income may not be used for the benefit of members.
Arizona HOA tax return filing requirements
So now that we understand the requirements at the federal level, let’s take a look at the Arizona requirements.
HOAs who qualify under IRC § 528 are not exempt from tax under Arizona law. The Arizona statute is A.R.S. § 43-1201(A). These organizations are required to file an Arizona corporate tax return on Form 120A or Form 120.
Be careful because some HOAs are federally tax-exempt under IRC § 501(c)(4) as social welfare organizations. They may also be exempt under IRC § 501(c)(7) as clubs organized for pleasure or recreation. These HOAs are also tax-exempt for Arizona income tax purposes. They will typically file Arizona Form 99.
In addition, an Arizona law was enacted in 2005 that requires the Board of any HOA to complete an annual financial audit, review, or compilation no later than 180 days after the end of the HOA‘s calendar or fiscal tax year. This report must be made available to resident members within 30 days of completion.
Federal HOA filing requirements can be difficult enough, but states can sometimes be even more challenging. This is often because they are simply overlooked.
Complying with Arizona HOA tax return filing requirements should be relatively easy. Make sure you employ a qualified CPA or tax professional to ensure compliance.
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Make sure you understand Arizona HOA tax return filing requirements.