The subject of HOA taxes can be a source of frustration for many homeowners associations. But, do HOAs have to pay federal and state income taxes at all?

HOA Taxes: Understanding Federal and State Requirements

A majority of homeowners associations are incorporated as nonprofits in their state. But, just because an HOA is organized as a nonprofit does not mean it is automatically exempt from paying taxes or filing tax returns. At the federal level, all homeowners associations do need to pay taxes and file their tax returns. The only exception to this is if the association is recognized by the Internal Revenue Service as an exempt organization under 501(c)(4). But, qualifying for that exemption is rare for an HOA.

To file homeowners association taxes at the federal level, it is necessary to complete and submit either Form 1120 or Form 1120-H. Most associations prefer filing Form 1120-H because it is simpler and provides certain tax benefits. Either way, though, board members should hire a Certified Public Accountant (CPA) to help them fill out the form and gather all supporting documentation.

But, what about state income taxes? Do homeowners associations have to pay taxes to their state government? More often than not, the answer is yes. However, there are some exceptions. A handful of states don’t collect income tax from corporations, which homeowners associations typically fall under.

Additionally, every state may have its own set of requirements and deadlines for filing a state HOA tax return. States also usually have different forms to complete and varying rules when it comes to filing extensions. As such, it is best to seek the help of a CPA to help with your state tax filing process.

Are HOAs Exempt from Taxes?

Homeowners associations are generally NOT exempt from income tax. But, there are a few states that don’t collect income tax from corporations. These are Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming. Although Alaska and Florida do not have state individual income tax, they do collect corporate income tax. Regardless of state income tax laws, though, associations still generally need to pay and file federal income tax returns unless otherwise exempted.

Nevada

Nevada does not collect corporate income tax, but it does tax organizations that employ workers. As such, if an HOA reports gross wages to the Nevada Employment Security Division (NESD), it must pay the state’s modified business tax. Moreover, the HOA must file a return for the modified business tax with the Department of Taxation. Corporations automatically receive modified business tax returns from the NESD after registering with the Department of Taxation. There is also an option to download the forms through the department’s website.

Ohio

Ohio also does not collect corporate income tax. However, it does collect a commercial activity tax (CAT) as well as a sales & use tax. Homeowners associations generally don’t have to pay CAT. but, if an HOA is involved in selling goods, it will need to file a sales & use tax return with the state. Additionally, homeowners associations don’t need to pay a state franchise tax if it solely consists of residential properties.

South Dakota

South Dakota is another state that does not have a corporate income tax. This means that homeowners associations don’t need to pay or file their income tax with the state. It is worth noting, though, that HOAs still need to pay and file their federal tax returns.

Texas

Texas does not have a corporate income tax. Therefore, homeowners associations are not required to pay or file a corporate income tax return with the Lone Star State. That being said, homeowners associations are still required to pay and file their federal tax returns. Texas also has a gross receipts tax that associations must pay.

Washington

The state of Washington does not collect personal or corporate income taxes. As such, homeowners associations need not pay or file state income tax returns. However, HOAs are still required to pay a gross receipts tax (business and occupation tax).

Wyoming

Wyoming also does not collect personal or corporate income taxes. This means corporations like homeowners associations don’t have to pay or file state income tax returns. Still, they do need to pay and file federal income tax returns.

For Homeowners: Are HOA Fees Tax Deductible?

Tax season is often a pain point for homeowners. Not only does it mark another expense to deduct from their household budget, but filing tax returns can also bring headaches. It is not always easy to understand how taxes work, and figuring out which expenses are deductible only adds to the frustration. One thing that a lot of homeowners want to know, though, is whether or not they can deduct HOA fees from their personal taxes.

In general, HOA fees are not tax-deductible. But, there are some instances where owners can deduct them, such as:

• If an owner uses their home or condo as a rental property (if the owner rents out only a portion of the property, they can deduct a percentage of their HOA fees)
• If an owner uses their home or condo as a business (they can’t deduct the entire amount but only a portion of it)

For owners who only rent out their homes for a few months out of the year, fees are deductible for the months when the home functions as a rental property. The second circumstance can also apply if an owner uses only a part of their home for their business (such as a home office). Keep in mind, though, that these only pertain to regular HOA dues. Owners typically can’t deduct special assessments.

Getting Help

Dealing with HOA taxes is rarely a walk in the park. For a lot of HOA boards, it is the one time of the year they wish wouldn’t come. But, tax season does not have to bring dread. Hiring the right professionals can significantly ease the process.

In addition to taxes, board members also have to manage other aspects of the association. Simplify and automate your job with Condo Manager. Call us today at (800) 626-1267 or contact us online to request a free demo.

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Are HOAs required to file tax returns? Even though they are non-profit organizations, all HOAs must still file their income tax return each year. To better understand the requirement, here’s everything you need to know about the homeowners association tax form, also known as Form 1120-H for HOAs.

What Is Form 1120-H for HOAs?

Initially, HOAs had to file Form 1120, which is the corporate income tax return. Form 1120 is more complicated and does not exempt the payment of tax on dues and assessments. However, after the Tax Reform Act of 1976 was passed, HOAs were no longer required to file Form 1120. Instead, they would file for Form 1120-H.

Form 1120-H is the income tax return for homeowners associations. Compared to Form 1120, this form allows for a more simplified HOA tax filing process. It also allows HOAs to enjoy certain tax benefits that are outlined in Section 528 of the Internal Revenue Code. One of the main benefits is that HOAs can exclude membership dues, fees, and assessments (also known as exempt function income) from their gross income.

For the Internal Revenue Service (IRS), a homeowners association can be a:

• condominium association
• homeowners association
• timeshare association

There are five requirements to qualify as an HOA:

• At least 60% of gross income should be exempt function income
• At least 90% of annual expenses should be for the association’s business
• No private shareholder or individual should benefit from the association’s earnings
• At least 85% of housing units should be residential
• The association must file Form 1120-H to enjoy Section 528 benefits

If your HOA does not meet the above conditions or fails to file Form 1120-H, it will be required to file Form 1120 and thus, will be subjected to the regular corporate tax rates.

Important Terms for the HOA Tax Form 1120-H

Filling up Form 1120-H for the first time can be quite confusing. If you’re looking for Form 1120-H instructions, here’s a brief explanation of the different terms you’ll encounter.

• Exempt Function Income: This refers to dues, fees, or assessments paid by members of the HOA. The exempt function income is deducted from the gross income when calculating taxable income.
• Non-Exempt Function Income: This refers to income earned from non-members of the HOA, payments from association members for the specific use of facilities that are not open to all members, income from work performed outside the HOA’s property, and interest on reserve account earnings.
• Expenses: Form 1120-H examples for expenses would be repairs, maintenance fees, legal fees, management fees, insurance premiums, and property taxes.
• Dividends and Interest: HOAs that put their reserves in a money market account will generate taxable interest income while reserves invested in money-making stocks will generate taxable dividend income.
• Deductions: This refers to expenses incurred when generating non-exempt function income. Examples include production costs, advertising fees, and rent from subleasing HOA property. Associations are also entitled to a standard $100 deduction.
• Tax Rate: The IRS has a 30% flat tax rate for HOAs and COAs. For timeshare associations, the tax rate is 32%.

Frequently Asked Questions About Tax Form 1120-H for HOAs

For a more comprehensive understanding of the IRS Form 1120-H, here are the answers to the most common questions:

Who Must File Form 1120 H?

All HOAs must file their tax returns. Form 1120-H is typically handled by the HOA board treasurer. However, preparing and filing the tax return for HOAs can be complicated if your treasurer does not have adequate experience. It’s recommended to consult your HOA’s CPA, attorney, or management company to ensure that Form 1120-H is properly filled up.

Does an HOA Need a Tax ID?

Since HOAs are required to pay taxes, they are assigned a federal tax ID number. On the Form 1120-H for HOAs, the tax ID is written in the Employer Identification Number box

Can Form 1120 H Be Filed Electronically?

You cannot create an e-file for Form 1120-H for HOAs. Electronic filing is currently not supported by the Modernized e-File (MeF) program of the IRS. Form 1120-H must be filed on paper.

When Are HOA Tax Returns Due?

Form 1120-H must be submitted on the 15th day of the 4th month following the end of the association’s fiscal year. However, if your fiscal year ends on June 30, Form 1120-H must be submitted by the 15th day of the 3rd month following the end of the fiscal year (September).

If the Form 1120-H due date falls on a weekend or holiday, the tax return for HOAs should be submitted on the next business day.

What Happens If HOA Does Not File Taxes?

If your HOA fails to submit Form 1120-H, it will be forced to file for Form 1120 — which does not have the same deductions.

If your HOA does not file its tax returns, the IRS will impose several penalties. The failure to file penalty is 5% every month, with a maximum penalty of 25%.

Meanwhile, the failure to pay penalty is 0.05% of the unpaid tax liability per month. It won’t exceed 25% Your unpaid balance will accrue interest from the due date up until you can pay the balance in full.

Importance of Filing Form 1120-H for Homeowners Associations

Filling up Form 1120-H requires a lot of planning and preparation. Gathering receipts, invoices, and other relevant documents takes time, especially if you are keeping a manual filing system. You also need to pay attention to every detail to avoid inaccuracies, as these will attract hefty fines from the IRS. Overseeing your HOA’s Form 1120-H is a major responsibility. If you need assistance, do not hesitate to reach out to professionals with established tax experience.

RELATED ARTICLES:

• Are HOA Fees Tax Deductible?
• HOA Accrual Accounting: Why It’s The Best For HOAs
• Your Ultimate Guide to HOA Fees