It’s almost that time of year again. Time for homeowners and businesses alike to pay their taxes.
Taxes are a necessary evil. Nobody likes to do them, but if you don’t file, you’ll be met with late fees and penalties. For some businesses like HOAs, tax filing procedures can be a bit foggy.
Are HOA taxes necessary? What forms do they need to fill out, and what happens if they file late?
Don’t worry, we have the answers to all of these burning questions and more. Check out this guide to learn everything you need to know about HOA fees and taxes.
Does an HOA Pay Taxes?
The answer to this question is foggy at best. For the most part, HOAs are held to the same tax filing standards as any other business.
There’s only one exception to the rule. You have to file as a non-profit with the IRS. If they’ve accepted you as one, you’ll earn a tax-exempt status.
Keep in mind that becoming tax-exempt takes a lot of paperwork. You’ve got to meet some pretty specific qualifications.
Necessary Forms
The hardest part of filing taxes is knowing what forms you need to fill out. The main two that you need to concern yourself with are form 1120 and form 1120-H
Form 1120
Form 1120 is the most complicated to fill out. You’ll need to have a lot of information on hand to be able to complete the paperwork.
All your HOA’s net income will be taxed under this form. That includes any unused cash that you have at the end of the year. On the upside, form 1120 comes with a low tax rate.
It’s not recommended to file yourself, however. You’ll need to hire someone with accounting knowledge to help you.
Form 1120-H
If you don’t like the idea of all your income being taxed, you can fill out an 1120-H form instead. Under this form, you’ll only have to pay taxes on your non-exempt income.
You’ll have to meet specific requirements to qualify for an 1120-H. At least 60% of your gross income for the year must fall into the category of exempt function income.
Around 90% of all your year’s expenditures had to go toward the maintenance of residential properties. No private shareholder can profit from your HOAs net earnings.
1120-H Extension Filing
Let’s say that you have to file your taxes late for whatever reason. If you know that you’re not going to make it, you can request an 1120-H extension by filing a 7004 form before the deadline passes.
If approved, you’ll get a 6-month extension. If you can’t pay your dues by then, you’ll face HOA fees and penalties.
Exempt and Non-Exempt Income
You’ve seen the terms exempt and non-exempt income thrown around a lot. It’s crucial that you know what they mean before filing your HOA taxes.
Exempt income includes the revenue that you bring in from association and membership fees.
Non-exempt income is the revenue that comes from services that you provide your residents. This includes laundry, vending machines, tennis courts, pools, clubhouse rentals, and rent from people who use your facilities without being members.
Rollovers
Let’s say that after crunching the numbers at the end of the year, you discover that your HOA has earned a significant amount more than you normally do. You have the opportunity to roll those funds into your taxes for the next year.
This will prevent you from having to pay taxes on all that income. You may be able to delay your taxes altogether.
The other benefit of rolling over your extra income is that you can tap into it when your HOA makes less money than you would like.
State Taxes
Do you need to pay state taxes? The answer is that it depends. Tax rules tend to vary from state to state.
You’ll have to read up on the rules in your area to find out what you need to do. Your taxes for HOA, HOA taxes accountant can help you out if you find yourself a bit lost.
How Much Will You Owe?
In most cases, only non-member income is taxable. That means that while you still have to file, you shouldn’t have to worry about paying too much.
Again, depending on where you live, you may have to pay state taxes, but that shouldn’t break your bank too much.
When Are Your Taxes Due
Like everyone else, you’ll have to file your taxes on or before April 15th. There is an exception. If your fiscal year ends on June 30th, you have to file your taxes before March 15th.
Visit the IRS website to get specifics. You can also get information on extensions and fill out your forms.
Hire Help
Your treasurer is responsible for handling your HOA’s finances. That being said, HOA taxes can be confusing and unique. You may need to hire an accountant to act as your treasurer’s backup.
They’ll help you avoid penalties by making sure all your paperwork is done on time. They also have a special understanding of HOAs and how they work.
Understanding HOA Taxes
Everyone has to pay taxes at the end of the year. This includes homeowners associations.
HOA taxes can be a bit unique. If you don’t get help filling out the paperwork, you may find yourself getting a bit lost. Talk to an accountant to make sure you’re filling out the proper forms.
For more tips for homeowners associations, visit the Home & Real Estate section of our blog.
