Homeowner Association Tax Returns

Homeowner's associations have specific tax filing requirements depending on their structure and financial activities. Here are the different types of tax returns that an HOA can file:

1. Form 1120-H (U.S. Income Tax Return for Homeowners Associations)

Purpose:

- Designed specifically for qualifying HOAs to report their income and expenses.

Qualifications:

- At least 60% of the HOA's gross income must come from membership dues, fees, or assessments.

- At least 90% of the HOA's expenses must be for the acquisition, construction, management, maintenance, and care of association property.

- 85% of the units must be residential property.

- The HOA must elect to file Form 1120-H each year by checking the appropriate box on the form.

Advantages:

- Simpler form and less stringent record-keeping requirements compared to Form 1120.

- A flat 30% tax rate applies only to non-exempt income (e.g., interest, dividends).

2. Form 1120 (U.S. Corporation Income Tax Return)

Purpose:

- Used by HOAs that do not meet the qualifications for Form 1120-H or choose not to file it.

Qualifications:

- Can be filed by any HOA, but is often used if the HOA has significant non-exempt income or does not meet the criteria for Form 1120-H.

Characteristics:

- Subject to the standard corporate tax rates, which may be more favorable than the 30% rate on Form 1120-H for certain types of income.

- Requires more detailed accounting and record-keeping.

- Allows for the deduction of operating expenses against taxable income.

Considerations:

- Filing Form 1120 may result in a lower tax liability for HOAs with substantial non-exempt income.

- Requires careful tracking of income and expenses to comply with corporate tax rules.

3. Form 990 (Return of Organization Exempt from Income Tax)

Purpose:

- Used by HOAs that qualify as tax-exempt organizations under Section 501(c)(4) of the Internal Revenue Code.

Qualifications:

- The HOA must apply for and receive tax-exempt status from the IRS.

- Must operate primarily to promote social welfare and not to make a profit.

Characteristics:

- Form 990 requires detailed reporting of the HOA’s activities, income, expenses, and governance.

- There are several versions of Form 990 (Form 990-N, Form 990-EZ, and Form 990) depending on the HOA’s gross receipts and total assets.

Advantages:

- Tax-exempt status can provide significant tax savings.

- Requires comprehensive disclosure, promoting transparency.

Considerations:

- Obtaining and maintaining tax-exempt status involves ongoing compliance with IRS requirements and reporting obligations.

Choosing the Right Form

Form 1120-H vs. Form 1120:

- Form 1120-H is often preferred for its simplicity and clear tax rate, despite the 30% tax rate on non-exempt income.

- Form 1120 can be advantageous if the HOA has higher non-exempt income or incurs substantial deductible expenses, as it may result in a lower overall tax liability.

Form 990:

- Suitable for HOAs that qualify and opt for tax-exempt status under Section 501(c)(4). This choice requires meeting specific criteria and adhering to more stringent reporting and operational guidelines.

HOAs have several options for tax filing depending on their financial activities, income sources, and organizational structure. Form 1120-H is the most straightforward for qualifying HOAs, while Form 1120 may offer tax advantages for associations with significant non-exempt income. Form 990 is suitable for those HOAs that qualify and choose to operate as tax-exempt organizations. Properly choosing and filing the appropriate tax return is essential for compliance and optimizing tax liability.