Many Homeowners Associations get confused when filing their annual taxes. Inexperienced board members need help understanding which tax reports to file, how to complete Form 1120 and if their HOA income is tax-exempt. Incorrect tax filings result in unexpected fines, costing the association money while leaving board members responsible.

You are not alone if you aren’t sure how homeowners association taxes work. Here are common questions received from our HOA clients. 

Are Homeowners Associations required to file tax returns? 

Yes. Even though the state often determines HOAs as nonprofit, the federal government views them as corporations. Because of this, HOAs pay federal taxes. 

There are, however, some exceptions such as when an HOA registers as a nonprofit organization with the IRS. This only occurs sometimes and first requires filing a Form 1024. 

What HOA tax forms are required? 

HOAs file Form 1120. These are cumbersome forms that require substantial information to complete. Don’t worry; our Tax Time team is well-versed in HOA filings and can complete this process. 

What happens if money remains on the books at the year’s end?

Homeowners Associations must pay taxes on unspent money. Each board treasurer must set aside enough funds to pay the taxes owed. Record keeping is vital!

Is an HOA required to file Form 1120? 

There are some exceptions to this form, such as if the HOA collects over 60% of its annual income from dues, fees, assessments or interest, and more than 90% of the collected funds go to maintenance or property additions. After meeting these two requirements, the HOA may bypass Form 1120 and use section 528 of the tax code to file Form 1120-H instead. This allows an HOA to only pay taxes on non-exempt income. 

What is considered non-exempt tax income? 

Non-exempt tax income includes the income earned from renting HOA-owned properties, vending machines and earnings from dividends and interests. Again, record-keeping is the key. The IRS requires support documentation on non-exempt income.

 Is Form 1120-H required annually?

Yes. They must meet annual qualifications by filing Form 1120-H within a specific window following the tax year. Afterward, homeowners associations must reprove their qualifications each year. 

What are some tax exemptions for Homeowners Associations?

An HOA can qualify as a social welfare organization if they maintain common areas, sidewalks, and streets. However, they must prove that these are common public areas, not restricted to specific individuals. 

When does an HOA file taxes? 

Because HOAs are considered nonprofit, the fiscal year determines the deadline for filing. For instance, if the fiscal year lands on a calendar year, the tax returns are required by March 15th, the IRS business filing deadline. 

What if an HOA fails to file a tax return?

Several clients discovered previous boards failed to file the necessary tax returns. Is it an issue? Yes. Can we help? Absolutely. First, we must first determine the number of missed tax returns and file them as soon as possible. Then, we can determine your eligibility to file a Form 1120-H for the missed years or if Form 1120 is required. 

Some homeowners associations are elected board members who are volunteers and members of their local community. Because of that, it is easy for an HOA to overlook the need to file taxes. This is why outsourcing HOA financials and tax management to Tax Time helps. Our organization can do the heavy lifting for you, inform and educate your members on what is necessary to file each year. Give us a call. We are here to help!