Things to Consider When Preparing Your HOA Tax Return
There’s nothing quite like the stress of tax season. For HOA board members or property management companies, that stress can be exponentially greater trying to navigate when and how to prepare your respective HOA for tax season. What makes HOA tax returns complicated is their unusualness as a non-profit entity. For either newly-appointed board members or unseasoned property managers, filing this type of tax return properly can become quite a headache without proper guidance.
Creating the smoothest possible path through the HOA tax return process starts with not only understanding a few basic guidelines on how these returns work but understanding how to cover all of your HOA’s bases so that the return is thorough and errorless in terms of accounting. Below, you’ll find guidelines and tips for preparing your HOA for the heart of tax season, as well as how to file your return when the time comes around.
Understand that you do have to file an HOA tax return
One of the easiest missteps to begin with an HOA board member or management company is to assume that your respective HOA is somehow exempt from a tax return because it’s designated as a non-profit organization. All HOA’s must file returns during tax season despite the non-profit labeling. Although it will become more apparent as to why HOA’s are required to file tax returns as we get into more specifics below, step one of this entire process is knowing that, yes, filing a return is an undisputed requirement according to the IRS. It still considers the HOA to be a business.
Form 1120 & Form 1120-H
Arguably the most critical component to being adequately prepared for tax season within your HOA, it’s vital that those appointed to filing their HOA’s tax returns understand the proper form they need to fill out. There are essentially two avenues with which HOA’s can choose to file: the more traditional Form 1120 or the specifically designed, HOA tax-related Form 1120-H created by the IRS.
Although Form 1120 is the typical form used to document income tax for corporations, it’s used much less frequently than Form 1120-H as long as the HOA attempting to file a Form 1120-H qualifies under the IRS’ HOA-specific guidelines. This is where the two forms ultimately differ, but meeting these requirements will tell HOA board members or management companies how to proceed.
Form 1120-H’s requirements mostly revolve around HOA income and expenses.
For an HOA to file an 1120-H, HOA’s gross income must consist of:
- At least 60 percent exempt income (more on this below).
- At least 90 percent of its expenses must be for building and maintaining the HOA’s properties and amenities.
- No private individuals can achieve financial or personal gain from either of the two components mentioned above.
Many, if not most, HOA’s typically qualify in these regards; form 1120-H is a handy and popular tool to help board members and management companies file quicker, with less intensive labor to meet the demands of the traditional Form 1120.
However, this does not mean that even if an HOA meets the Form 1120-H requirements, it’s required to file under that form. HOA’s have the option of choosing either of the two forms to file under based on which option gives the HOA the best return. The only consideration that must be made at that point is whether or not the HOA’s treasurer or management company’s accounting team is willing to put in the extra time for the much more complete Form 1120 to achieve a better result.
Exempt & Non-Exempt Income
Being prepared for tax season within your HOA means understanding the full scope of what your HOA is filing in terms of income. That means fully understanding how exempt income and non-exempt income apply to your HOA’s accounting records and utilizing those numbers to get the best return possible.
Although navigating the differences between Forms 1120 and 1120-H is vital to the process, their differences remain moot if you don’t know how to categorize your HOA’s income properly.
An HOA is essentially the type of income an HOA receives from membership dues, fees, fines, or any other income sourced from association members. In nearly every case barring a few exceptions, exempt income is non-taxable for HOA’s. Those in charge of preparing their HOA’s tax documents should be thorough in making sure they don’t misreport these numbers or claim unnecessary income that might have been exempt.
Non-exempt income revolves primarily around money earned through the HOA’s provided services, with anything from vending machines to amenities and facility rentals. This income is taxable and must be reported to the IRS accurately. Along with non-exempt income, those in charge of preparing an HOA tax return should be calculating and documenting your respective HOA’s expenses involved in creating the services that allow for this non-exempt income. HOA’s can deduct this non-exempt income from a tax return if they can adequately document that the expenses involved in those services went towards the 90 percent building and maintaining requirement specified in Form 1120-H.
However, a key aspect to this maneuvering that board members and management companies should be aware of is the tightrope walk of documenting expenses to reduce the amount of taxable income on an HOA, but not so much that it drops an HOA below the 90 percent mark required by Form 1120-H for HOA maintenance. As far as tax preparations go, this is where those in charge need to be preparing their documents in advance to avoid starting the expenses versus taxable income calculations much too late.
The Tax Return Deadline
Preparing an HOA tax return should also be aware of the deadlines for tax season and how and when to apply for an extension if necessary. For HOA’s, this deadline is April 15th. If an HOA were to need an extension from this deadline, there are options.
All that an HOA would need to complete to file for a tax return extension is submit what’s known as Form 7004, which allows for an extra six months to file appropriately. Due to the frequently complicated nature of filing within an HOA (especially if an HOA were to submit a traditional Form 1120 instead), these extensions are relatively common. They should be utilized if those in charge of the tax return are running into obstacles properly documenting the association’s full financial report. Although extensions allow for more time to file the return, this does not extend the deadline for when the HOA would owe money to the IRS. That deadline remains the same.
Start preparing now
Often, where those in charge of preparing HOA tax returns make mistakes, they don't leave themselves enough time to prepare those returns before the IRS deadline. Therefore, it’s imperative that, even if this current tax season is over for your respective HOA, you begin preparing for next year’s returns as much as you can now. If specific requirements within Form 1120-H confuse you, or if you’re starting to find holes in the way your HOA documents exempt and non-exempt income, then more time on your side will pay off.
With these basic guidelines, along with a proper timetable and assistance where needed, preparing your HOA for tax season can become a much less daunting and far more productive task than you ever thought possible.