Board members often have a hard time navigating HOA taxes, especially when they don’t have an accounting background. While technically nonprofit, associations still have an obligation to pay taxes and file returns. Understanding the process, due dates, and forms will allow the board to get started on the right track.
Do Condo Associations Pay HOA Taxes?
Condo associations and HOAs are organized as nonprofit corporations. With this in mind, many boards wonder, “Does an HOA pay taxes?” The answer is yes.
While associations are classified as nonprofit corporations, they are not exempt from taxation. In fact, there are only a handful of organizations that the Internal Revenue Service (IRS) considers tax-exempt. If an HOA or condo association wishes to get an exemption, it must apply for tax-exempt status.
In short, HOAs and condo associations must still pay taxes and file tax returns.
How to File HOA Taxes
Most associations must file a federal HOA tax return every year, even if they are organized as nonprofit corporations. The process generally involves gathering financial records, determining the appropriate tax form, and filing with the IRS by the applicable deadline.
1. Gather the Association’s Financial Records
Before filing, the board should compile all pertinent records, including but not limited to:
- Income and expense statements
- Balance sheets
- Bank statements
- Reserve account records
- Investment statements
- Dues income records
- Vendor payment records
- Prior-year tax returns
It is important to ensure that these records are accurate. In doing so, the association can prepare its tax documents correctly.
2. Determine Which HOA Tax Form to Use
The next step is to choose the tax form for HOA or condominium use. Most associations file one of two federal tax returns: Form 1120 and Form 1120-H. Many HOAs have their CPA calculate taxes under both methods before deciding which form to file.
IRS Form 1120
Some associations elect to file the standard corporate tax return, Form 1120. In that case, the association is taxed under the regular corporate tax rules. This form is typically more complex, but it can result in lower taxes for certain associations, depending on their income and expenses.
IRS Form 1120-H
Form 1120-H is the tax return specifically designed for HOAs or condo associations that qualify. To use Form 1120-H, the association must meet certain IRS requirements, including tests related to:
- Residential use of the property
- Sources of income
- How expenses are spent
Many associations choose Form 1120-H because it is generally simpler. Under this form, taxable income is generally taxed at a flat 30% HOA tax rate. This rate applies primarily to the association’s taxable non-exempt income, such as interest earned on reserve accounts, investment income, and certain rental income. Member dues are generally excluded from taxable income if the association qualifies for Form 1120-H.
3. Identify Taxable Income
The board should understand that not all HOA income is treated the same for tax purposes. It will depend on the HOA tax filing requirements.
Common taxable income may include:
- Interest earned on reserve accounts
- Certificate of deposit (CD) earnings
- Investment income
- Clubhouse rental income
- Cell tower lease revenue
- Advertising income
- Other non-member income
4. Review State Tax Requirements
In addition to federal taxes, many states require state income tax returns. In Illinois, if an association files federal Form 1120-H, it must file Form IL-1120 (Corporation Income and Replacement Tax Return). The Illinois return uses the taxable income reported on the federal return as its starting point.
This commonly applies when the association has taxable income, such as:
- Interest earned on reserve accounts
- Investment income
- Rental income
- Cell tower or antenna lease income
- Other non-assessment income
For tax purposes, HOA dues from owners are generally treated favorably. Income from sources outside the membership, such as interest earnings or rental revenue, is more likely to be taxable.
5. Keep Tax Records
The HOA should retain copies of all financial and tax records. These include filed tax returns, financial statements, CPA workpapers, IRS correspondence, and tax elections or filings.
While these records may not seem important now, they can come in handy for audits, financial reviews, and disputes. Additionally, future boards can also use them as a reference.
FAQs on HOA and Taxes
Many boards have misconceptions about HOA taxes. Here are the answers to the commonly asked questions.
When are HOA taxes due?
For most associations, federal tax returns are due on the 15th day of the fourth month after the end of the association’s tax year. For example, April 15 is generally the HOA taxes due date for calendar-year associations. On the other hand, associations that operate on a different fiscal year will have a different deadline.
Can an HOA ask for an extension?
Yes, an association that files either Form 1120 or Form 1120-H can request an automatic extension by filing IRS Form 7004 before the original tax return due date. For most HOAs, Form 7004 provides a 6-month extension to file their tax form.
That said, an extension to file their tax return is not an extension to pay. This is a common misconception. An extension simply gives the association more time to submit its tax return. It must still pay any owed taxes by the original due date. Failure to do so can result in interest and penalties.
Who is responsible for filing HOA taxes?
Many associations seek help from a Certified Public Accountant (CPA), a tax professional, or their HOA management company to comply with tax obligations. That said, the HOA board is still responsible for ensuring proper and timely tax filing and payment. For this reason, boards must understand tax filing requirements and maintain a schedule to keep CPAs or other third parties on track.
Are HOA tax returns public?
In general, no, tax returns are not public records. Unlike charitable organizations that file IRS Form 990 and must make those returns available for public inspection, HOAs and condos typically file IRS Form 1120-H or IRS Form 1120, which are confidential tax documents. This means the general public can’t access them through the IRS.
That said, whether owners can inspect the association’s tax returns is a different question. In Illinois, owners have a right to examine the association’s financial records, often including tax returns.
Are Fees HOA tax deductible?
For most homeowners, HOA fees are not tax-deductible. The IRS generally categorizes dues and assessments as personal living expenses, much like utility bills or home maintenance costs. As a result, homeowners who use their property as a personal residence typically can’t deduct HOA fees on their federal income tax return.
Of course, there are some exceptions. For one thing, if the owner uses the property as a rental, then dues fall under rental operating expenses and may be deductible. Similarly, if a homeowner qualifies for the IRS home office deduction, a portion of HOA fees may be deductible.
Ultimately Responsible
The obligation to pay HOA taxes and file returns rests on the association board’s shoulders. While hiring professionals can certainly prove helpful, it remains the board’s job to ensure that it meets its tax requirements and avoids penalties. The first step in fulfilling this duty is understanding how taxes and returns work.
First Community Management provides expert HOA, condo, and co-op management services to communities in Chicago. Call us today at (312) 829 8900 or contact us online to learn more!
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