HOA Tax Assistance
The state of Colorado views homeowners’ (HOA) associations as non-profit corporations, however this does not mean the homeowners’ association is tax exempt. Tax laws require all HOAs to file tax returns. Filing a tax return for a HOA tax may not be as complex as filing for a larger corporation or other business, but it does require a good understanding of the tax laws which pertain solely to the HOA.
Inadequate knowledge of HOA taxes, or failure to file HOA taxes, may cost your association tax penalties and interest, and may result in complicated problems with federal or state taxing authorities. The complexities of community association and HOA taxes should not cost your organization more than its fair share of taxes so it is critical that the Association maintain a good system to stay on top of annual filing requirements.
At McNurlin, Hitchcock & Associates, we have over 50 years of combined experience working with Homeowners’ Association. We can help you navigate the complexities that characterize this field.
Here are some typical questions we are asked regarding Homeowner Association taxation.
Are HOAs Required to File Tax Returns?
It is a common myth that HOAs are not-for-profit entities that are not required to file tax returns. This is not the case. The Internal Revenue Service (IRS) does not view HOAs as non-profit organizations unless the HOA has applied for, and received, nonprofit status under the Internal Revenue Code Section 501(c). While HOAs are established with no intention of making a profit, the IRS views them as corporations that must file tax returns. If you have not been filing your tax returns, contact us immediately for professional assistance.
Fortunately, the requirement to file annual tax returns does not mean your organization has a tax liability. The IRS deems most HOA income to be exempt from taxation, meaning you report the income but you do not have to pay tax, even when your income exceeds expenses. However, not all income types are tax-exempt for the HOA. We advise that you seek professional help when classifying income as taxable, or tax-exempt. Our CPAs will provide guidance on what income is considered tax-exempt and what is not.
HOA Filing Requirements
The good thing about HOA taxation laws is that you can use forms 1120-H or 1120. You can switch between the two tax forms to reduce your income tax. However, this flexibility can also complicate the whole filing process. Choosing one form can increase your income tax, especially when you have little experience in homeowners’ association tax filing. You can contact us for professional help to eliminate this confusion and reduce your tax liability.
IRC Section 528 specifically designs form 1120-H for qualifying HOAs. Under section 528, qualifying HOAs do not pay taxes on income generated from exempt activities. Taking advantage of Section 528, your organization can accumulate reserves without paying taxes. But how does an association qualify for section 528?
Qualifying for Section 528
Your organization qualifies for section 528 if:
- At least 60% of its gross income for the tax year comes from exempt activities. The exempt income-generating activities include assessments, membership dues, late fees, and other incomes from residential unit owners. All other incomes, such as rental income, parking fees, and vending income are considered non-exempt.
- At least 90% of all expenditures go toward the general maintenance and upkeep of the residential units. These expenses can include costs of acquiring, building, managing, maintaining, or caring for the property.
- The members should not profit from the exempt income.
When an association qualifies for section 528 and intends to file form 1120-H, it starts by classifying revenue as exempt or non-exempt. The exempt revenues are reported, but they are not subject to taxes. Any excess of non-exempt revenue, over associated expenses, is subject to income tax at a flat rate of 30%. Associated expenses generally include costs incurred to raise the non-exempt revenue.
Examples of non-exempt revenues include dividends, interest, and capital gains from money held in reserves. Non-exempt incomes can also come from:
- Swimming pool charges
- Golf course fees
- Clubhouse rentals income
- Laundry income
- Fees on any recreational facility
- Vending machines
Tax Form 1120
HOAs that do not elect to file under Section 528 can file an 1120 under Section 277. Form 1120 is the regular tax return form for corporations and other profit-making organizations. While filing form 1120 is sometimes tedious and complicated, HOAs can still use it when they have a substantial amount of taxable income or when they do not qualify under Section 528.
The advantage of filing Form 1120 comes from the special treatment of HOAs. Most HOAs may prefer this form since they do not pay tax on all of their incomes. HOAs pay taxes on the excess of non-membership income, less associated expenses. Further, the taxes on form 1120 are a flat rate of 21% as opposed to the 30% flat rate on the 1120-H.
So Which Form Should HOAs File
Since homeowners’ associations can elect to file forms 1120-H or 1120, the decision on which form to file depends on the type of revenues and the longer term plan of the Association. Board members should consult with a professional to determine the tax form that best suits the needs of the Association. The election to file under Section 528 is an annual election and should be evaluated every year.
It is important to note that choosing the tax form that reduces your income tax is not always the best answer, and it is not always as simple as it sounds. You must consider the character and amount of all revenue streams to the Association when deciding on the appropriate form.
Benefits of Hiring A CPA Firm for Your HOA Taxation
Filing taxes for homeowners’ associations can be complex and tedious. A CPA firm simplifies the process by helping you classify income into exempt and non-exempt revenues. CPA firms can also help you reduce tax obligations by carefully analyzing incomes and choosing the correct form.
Without professional help, the confusion on which form to file can increase income tax and deny you the privileges outlined under section 528. Further, CPA firms save you time and energy put into classifying revenues and filing long forms. Hiring a CPA firm like McNurlin, Hitchcock & Associates, PC also keeps your association updated with changes in tax laws.
Contact Us for Profession Assistance with Your HOA Taxes
Professional assistance helps you comply with tax laws while reducing the amount of tax payable. Do not allow the uniqueness and complexity of homeowners’ association taxes to put you on the wrong side of the law. Contact us today for professional assistance.