Whether you’ve filed an HOA tax return before or not, the process of filing a homeowners association tax return never gets easier. This normally comes from a lack of information regarding the whole process. There still seems to be a lack of resources surrounding filing for an HOA which is why we’re currently trying to break down the barriers. Today, we have three things you need to do before filing an HOA tax return.
One thing that complicates homeowner association tax returns is the fact that each year the association has the option to file two different tax returns (Form 1120-H or Form 1120). Both have a separate set of rules and requirements and the association has the right to change from one form to the other each year.
Homeowners Association Tax Return Filing Requirements
Assuming the association qualifies under section 528, the first option is to file form 1120-H. This results in a tax rate of 30% on net taxable income (if any). The form is relatively straightforward and the filing is an annual election. Technically speaking, the election is made by the due date of the tax return, including any extensions. But the IRS will often accept late filed 1120-H returns (often returns that are 10+ years old).
IRC 528 is where the specific discussion of “exempt” and “nonexempt” income and expense items come into play. It spells out the basic requirements to be able to file form 1120-H:
- The HOA must be residential in nature (85% test);
- 60% of the HOA income must be “exempt” function income; and
- 90% of the expenses must be “exempt” function expenses.
While most homeowners association tax returns are filed on form 1120-H, form 1120 should not be ignored. Make sure you discuss the pros and cons of each form with your CPA so you can make the best choice for your community.
Homeowners Association Tax Documents
First and foremost, something you should be doing throughout the year is keeping all relevant documentation pertaining to the property or properties. This includes any 1099s issued or received. Why? Not only will this make the whole filing process easier, it’ll help you to decide between a Form 1120-H and a 1120 at the end of the tax year.
As you already know, at least 90% of your expenses will need to be for maintenance or upkeep if you’re to qualify for the Form 1120-H; this is the form designed solely for HOAs. Furthermore, membership dues are likely to make up the majority of your income. With all of your paperwork and financial statements set aside, filing for tax won’t lead to such a headache at the end of the year.
With HOA taxes, not everything will be taxable and not everything will be tax-free. With this in mind, you need to complete some research so you build, at least, a foundational layer of knowledge on the topic. If we look at non-exempt income, this will come in the form of interest, dividends, and rental income, such as the private rental of a clubhouse, pool facilities or even the use of a dock or boat storage. This includes any amounts that are not directly related to the activities of the HOA, including depreciation expense.
On the flip side, the cost of using your facilities won’t be taxed unless the income comes from a non-resident or a resident acting as a “customer”. In truth, we’ve only just uncovered the basics with these items so taking the time to research what income and expenditure goes where can be invaluable for your HOA.
If you need to, spend an hour creating a chart or table with all your expenses and income written down. Once you have this resource completed, you have it for the years ahead; you can just update it whenever the HOA changes or if the laws surrounding HOA tax change.
Homeowners Association Tax Return FAQ
There are many steps that must be in place. But usually the most important step is to contact a qualified and reliable accountant (typically a CPA is your best bet). If you’re wondering why we didn’t recommend an accountant in the first place, it’s because the first two tips are easy enough to do alone and we’re trying to save you money. By filing your documentation throughout the year and having a rough idea of what does and doesn’t apply to your tax return, your accountant will only have a molehill rather than a mountain of work when the time comes.
As long as you choose a tax expert who has experience in the HOA field, they’ll know exactly what to do. Just like hiring a website designer for your website, an accountant spends all day surrounded by HOA law so should be aware of the best decisions for your HOA.
With these steps in place, your homeowners association tax return won’t need to be so difficult or the thing you least look forward to on the calendar. Instead, it can be a simple process from start to finish.