When we talk to Georgia HOA and condo association clients, the question of whether they filed their annual tax returns comes up. Many times unfortunately the answer is “No.” Many Georgia HOAs and condo associations don’t understand the requirement to file tax on their association.
An estimated 35% of Georgia HOAs and condo association don’t file, and if they file, they are using a wrong process. Most of these are the self-managed associations. Here is what you should know about your association’s tax requirements and how to file accurately and timely.
Georgia HOAs and Condo Associations Need to File Annual Tax Returns
Many associations have been overlooking this responsibility for quite some time. HOA management believes that by being non-profit organizations, there is no need for them to file a tax return. Well, they are wrong; all Georgia homeowner associations file Articles of Incorporation with the Secretary of State.
Georgia and IRS treat all associations as corporations and are required to file federal and state tax returns. Only a Non- Profit entity under section 501(a)(4), form 990 may not file their returns. These associations have opened their areas to the public, like roads and parks.
IRS will grant them this privilege after thorough investigation of evidence provided to them to support the application for non-profit association status. These associations use their funds to improve their areas for the good of the general public. The state can also grant them funds to help maintain these areas.
Georgia HOA and Condo Association Filing Options
There are two options available for Georgia HOAs and condo associations to file their returns; they could file using Form 1120 or using Form 1120 – H. Form 1120 is a traditional corporate method. It is flexible with the expense allocation, as they do not have to maintain the 90% rule and have lower tax rates, 15% for the first $50,000 taxable income.
However, Form 1120 does not favor HOAs. First, they subject all HOA’s income to be taxable; any funds set aside or in excess of expenditure will be taxed. Second, it is complex for HOAs to file; it requires some level of accounting and bookkeeping that most HOAs do not keep. A good accountant is also required to make an estimate of their payable tax, a hard task to accomplish.
Georgia HOAs can elect to use Form 1120–H, to be taxed under Section 528 of the IRC. However, COAs and HOAs must meet the following criteria to qualify for Form 1120–H:
- 60% of revenue is gained from members and not the sale of goods and services.
- 90% of its expenditure is on operations and maintenance of the property.
- 85% of units should mostly be used as residences.
- Annual residual income must not be used to benefit association members.
Filing Form 1120–H exempts some of HOAs income from taxation. Income exempted must be generated from:
- Association dues and assessments.
- Fines and fees from the Architectural Control Committee.
- Late fees and interests on late assessment payments.
- Resident clubhouse and other facility rentals.
Taxable income is considered outside income and is generated from:
- Interest from banks and dividends.
- Guest fees, such as golf-course usage.
- Renting facilities like a clubhouse.
- Payment for easements, like cell towers.
To arrive at the net taxable amount, we deduct total expenses incurred solely to generate this taxable income, with support from records availed. A $100 deduction is allowed on taxable income, and a flat rate of 30% applied. IRS, however, allows associations to carry forward the excess to offset future payments.
Take Advantage of Form 1120-H
By filing Form 1120–H, Georgia homeowner associations find themselves with a reduced tax burden. To enjoy this, an association must file Form 1120–H annually, before its due date, including extensions. Once an association has filed Form 1120–H, they cannot revoke it unless IRS consents to it.
An association will have to request IRS consent by filing a ruling request; a fee is applicable for every ruling request applied. If HOA fails to file Form 1120–H by its due date, they get an automatic 12 months extension to make an election, after that they 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. Associations, however, have the liberty to compare total tax payable by Form 1120 and with that payable by Form 1120-H and file the form with a lower tax.