Homeowners associations are nonprofits, meaning they are probably exempt from paying taxes. However, there are different categories of nonprofits, with HOAs classified as common interest realty associations (CIRA). Under federal law, CIRAs must file tax returns. So, why do homeowners associations have to file tax returns, yet they are nonprofit organizations? Let’s find out.
Why Does an HOA Have to File Tax Returns?
Under Section 538 of the Internal Revenue Code, homeowners associations are subject to taxation. Although HOAs must file tax returns, they might not have a tax liability. Commercial and rental properties in an HOA community may write off taxes on repair, maintenance, and operating costs.
Tax Forms for HOAs
HOAs can choose from two different tax forms when filing returns. Determining the appropriate form to file can help your community benefit from tax savings. HOAs can elect to file their taxes using Form 1120 or Form 1120-H.
Each filing option has its fair share of upsides and downsides. Most HOAs use Form 1120-H to file their returns. This filing option is straightforward and has numerous tax benefits for HOAs. It allows the association to deduct its exempt function income (membership fees and dues) from its gross income.
The downside of filing Form 1120-H is that the association cannot claim a Net Operating Loss. It also cannot carry losses forward to the next financial year. Moreover, organizational costs are not tax deductible under this filing option.
Form 1120 is for HOAs taxed as C-Corporations. The form is more complex and requires the input of a certified accountant or tax expert. The main benefit of filing Form 1120 is that it allows the association to determine its income tax liability, resulting in the lowest tax dues.
That said, it is important to note that different states have varying laws, so conducting thorough research is critical to ensuring tax compliance. An HOA accountant can help HOA communities navigate these complex tax rules and maximize tax benefits.
Enlist Professional Tax Preparation Services
Understanding why homeowners associations have to file tax returns is the first step to ensuring compliance. However, preparing tax returns can be daunting for any HOA community. The board must review financial statements, calculate taxable fees, file the appropriate forms, and handle all the paperwork involved. Enlisting professional tax preparation services can ensure your HOA is tax-compliant. Contact Abel Accountants for specialized HOA tax return services.