Over the recent years, issues have arisen over the management of Louisiana HOAs and condo associations, and their communities. One common issue is filing federal and state taxes. Many homeowner associations, especially self-managed associations, do not know about the requirement to file tax on their association and therefore do not file.
Well, here are some basics you should have at your fingertips to help you file that income tax accurately and on time.
Lousiana HOAs are required to file
Homeowner and condominium associations are required by Louisiana Homeowners Association Act and Louisiana Condominium Act to follow State and Federal Statutes. HOAs and COAs are registered as non-profit corporations with the Secretary of State and are required to file federal and state tax returns. Good news is that even though a tax return is a requirement, it does not mean your HOA or COA owes the state any tax.
Lousiana HOAs and condo associations have filing options
HOAs and condo associations generally file Form 1120–H. It has a standard calculation which only takes into account the non-exempt income generated by an association. It has a $100 allowable deduction on taxable income and uses a flat tax rate of 30%.
In case of excess non-exempt income, Form 1120 could be used to file tax. This form is a little complex when compared to Form 1120 – H, it also takes into account all income generated, but it has a lower tax rate of 15% for the first $50,000 taxable income. Not many associations generate that much income.
Lousiana associations often have exempt and non-exempt income
HOAs and condo associations have two types of income: (1) Exempt function income is income generated from membership engagements, like dues, fees, assessments, and interest charged on members for late submissions.(2) Non-exempt function income is generated from other activities the association undertakes other than to their members, for example, income from bank interest, rented facilities like clubhouses and non-member use of property like a vending machine.
Don’t miss the tax filing deadline
Tax returns are due on 15th April if your association follows a normal calendar year. If your association follows a different calendar year, returns are due on the 15th day of the third month after year end.
However, if you fail to beat the deadline, you could file for an extension. Form 7004 is used to file for an extension, however, you will still need to pay fines for late returns from the date the returns were due to present.
Choosing the right tax form
Do an election for Form 1120–H before its due date that is 15th April, including extensions. Once your association has filed Form 1120–H, revoking it will be impossible unless IRS consents to it. Your HOA or condo association will have to request IRS consent by filing a ruling request; a fee is applicable for every ruling request applied.
If you fail to file Form 1120–H by its due date, you get an automatic 12 months extension to make an election, after that, you may lose the chance to file Form 1120–H that year and be forced to file Form 1120 and incur penalties on late tax payment.
If you file form 1120, excess income can be carried over to the next tax year. Revenue ruling 70 – 604 allows HOA and condo associations to differ and possibly avoid taxation on this excess. This excess income will be treated like it was refunded to the members and then subsequently repaid to the association as an assessment for next year.
Your association should make sure that any bylaws or agreements reflect that any excess in one year can actually reduce an assessment for a subsequent year.