As the end of the year approaches, we will soon be entering tax season. To help your board prepare for this busy time, SpectrumAM has put together some common questions regarding HOA taxes:
Where Does the CPA get the Amounts on the Tax Return?
All amounts found on an association’s tax return can be located by referencing the HOA’s financial statements at the end of the fiscal year. In most cases, the fiscal year ends on December 31, although an association’s bylaws may state a different fiscal year period.
Most amounts are taken directly from the income statement, as this reflects what was spent in each expense category or received from different types of revenues throughout the year.
What is Considered Taxable Income?
Taxable income is anything that is not exempt income. Exempt income will always include homeowner assessments received. Only income received will be reported on the tax returns.
Taxable income includes revenues received from things like interest earned (also known as unearned revenue), revenues received for selling items (such as replacement pool cards, gate keys, or similar items sold to those outside the community). Other items that may or may not be taxed, or may be taxed at a different rate, include selling a foreclosed home or selling property belonging to the HOA (easements, lots, parks, etc).
How are Deductions Determined?
An HOA is allowed the following deductions on their tax return:
- 5% of management fees paid throughout the year (to Spectrum or another management company for onboarded associations)
- 5% of legal fees paid throughout the year (legal only/not recoverable legal)
- the fee the CPA charges to prepare the tax return
Other deductions may apply, but this is on a case-by-case basis, determined by the activity of the HOA.
Not-for-Profit vs. Tax Exempt
While an association’s bylaws may dictate that they must operate as a not-for-profit entity, this is not the same thing as tax exemption. Tax exemption must be applied for through the IRS and granted by both the state and federal governments. A special type of tax return is filed once this is granted, and the exempt status can be revoked. A fee is paid to the IRS for processing the exemption, whether it is granted or not. This process is completed by the association’s CPA. Please note that not every association that applies for exemption will be granted the exemption.
State Returns vs. Federal Returns
In Texas, state tax filings are filed proactively for the year. While they use the same information that is on the federal return, the information report lists the board for the current year, as opposed to the previous year.
Arizona state filings follow the same tax reporting as the federal return.
Federal returns are filed using information for assessments and revenues received in the previous year. As the amount collected or earned can change from what is expected or billed, the federal tax return only reports what is received by the association.
We hope we’ve addressed any questions you may have about this upcoming tax season. If you need further assistance, your community manager is ready to help your board find the answers you seek. Here’s to productive tax preparation!