Homeowners’ associations are often organized as non-profits. By incorporating non-profit status into the bylaws of the community, the association is always registered as a non-profit. So, how does the IRS treat an HOA? Are homeowners’ associations corporations? Do HOAs have to file tax returns and pay taxes? These are very common questions and ones that, if not answered correctly, can lead to problems for your association. Read on for answers to these important questions!
Is Non-Profit the Same as Tax Exempt?
HOAs generally have non-profit status by default. This is because the purpose of the association is not to make money, but rather to maintain and govern. Being non-profit often gets confused with being tax exempt, which is different and unrelated.
As a general rule, HOAs are not tax exempt. For federal tax purposes, homeowners’ associations are considered corporations, regardless of whether it was created as a non-profit. Therefore, the association must file taxes as a corporation. The HOA is responsible for filing a tax return every year that it is in operation. Though an HOA does not function for profit, some activities may result in taxable income. For example, some communities sell t-shirts or mugs with the community logo, charge for use of the exercise or clubhouse facilities, or operate a hair or nail salon as part of their amenities. Income from such ventures is taxable, and the HOA is therefore responsible for paying taxes.
How HOA Income is Taxed
The majority of HOAs choose to file Form 1120-H or Form 1120. Under Form 1120, all the association’s income is taxable. Basically, any funds that are collected during the year, but not used, (for example funds that are set aside for maintenance or repairs that may take place in the following year) will be taxed, whereas under Form 1120-H only the “non-exempt” income is taxable, meaning that only funds that are not used or earmarked will be taxed. Thus, if they qualify, HOAs tend to file Form 1120-H.
But What if There is no Profit?
Even if your HOA has no extra income and is not required to pay any taxes, you are still required to file an official form with the IRS. Taxes can get a little tricky, especially when filing as a corporation. There are lots of particularities and details, and that is why it is always recommended that you use a tax professional to make sure that your HOA is on the right track and doing everything that is required to keep operations running smoothly and legally.
For more in-depth information regarding the management of HOA communities, be sure to check out our blog where we publish fresh content weekly. If you are interested in switching HOA management companies, contact Spectrum Association Management today to find out why our customers love us and what makes us refreshingly different.