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 at all, the IRS will impose several penalties. The failure to file penalty is 5% for every month with a maximum penalty of 25%.
Meanwhile, the failure to pay penalty is 0.05% for every month with a maximum penalty of 25%. Your unpaid balance will accrue interest from the due date up until you are able to 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. It takes time to gather receipts, invoices, and other relevant documents, especially if you are keeping a manual filing system. You also need to pay attention to each and 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.
Need help with your HOA tax returns? Feel free to contact the Condo Manager team today! Call us at (800) 626-1267, email us at firstname.lastname@example.org, or contact us online to learn more about our HOA software solutions.
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