There are many questions regarding a homeowners association (HOA) when it comes to taxes. How does it file taxes? Does it need to pay taxes at all? Can the association file as a non-profit organization? With some research into federal tax rules for a homeowners association, the answers become clear.
Does my homeowners association have non-profit status?
According to the federal government, homeowners associations are registered as corporations by default. Even if your HOA is considered an association or non-profit within your state, for federal tax requirements it must follow corporate tax filing rules. Having said that, there are some exceptions to this rule but they must be approved by the IRS beforehand. To be safe, if you have not received notification of a non-profit standing; you must file taxes as a corporation.
Exceptions to corporate ruling for a homeowners association
An association may be officially classified as a non-profit if it can prove that it provides a service to the public community. A homeowners association for a private, gated community would not be seen as “public.” Typically, the community and the reach of the association must be accessible by individuals who do not live immediately within the community. Services provided can vary but may include maintaining roads accessible to the public or landscaping a public park. If it can be shown that association dues contribute to these types of public benefits, then the HOA may be deemed a non-profit organization.
While it may be onerous to prove that your HOA is providing a public service, having non-profit status can save a homeowners association a significant amount of money annually on income taxes. To begin the filing process, look at “application for recognition of exemption”: IRS form 1024. It is highly recommended to bring in an advisor prior to submitting the application. The advisor will ensure that the association is allocating adequate money toward the public good in order to qualify for non-profit status as a public service provider.
Filing homeowners association taxes as a corporation
Generally, when filing taxes as a corporation you will need to fill out Form 1120; the “U.S. corporation income tax return.” This kind of tax form is not all that desirable for a homeowners association, however, as it is really designed for very large corporations. Because of its complexity, the homeowners association would likely need to pay for extensive bookkeeping services and an accountant; which could increase HOA expenses. In addition, the association would have to wrestle with the fact that any funds remaining on the account at the end of the fiscal year would be taxable. Eventually, the homeowners association may be required to file quarterly “estimated tax payments”, which brings about its own challenges.
Thankfully, there are some ways to avoid filling out Form 1120 (even if the association does not qualify for non-profit status). Section 528 is a specific document that allows a homeowners association to bypass Form 1120 with Form 1120-H; a document written specifically for homeowners associations. It is a single page document, which is substantially easier to understand and fill out. Now, you do need to meet the specific requirements on Section 528 to qualify for this, such as 60 percent of revenue falling under “except-function”, collecting membership dues, fees, interest and assessments. Additionally, 90 percent of the homeowners association expenses must be for maintenance, construction, management and acquisition.
Son-Rise Property Management is a full service property management company located in Bellingham, WA. Contact us today to see how we can help you find the perfect home to rent or manage your property.