Throughout most of the year, a HOA President is the focal point for scheduling meetings, conducting business and setting the agenda for the association. However, around tax time the HOA Treasurer – working in concert with the board’s community association manager – becomes very important.
Most community associations are set up as a corporation. However, just because these entities didn’t technically make any “profit” doesn’t mean they can skip on filing a tax form. Once an entity has registered with the IRS and is still operating, it needs to file the proper tax forms.
Filing a Form 1120
State income tax filing requirements vary from state to state. They are not the same as federal requirements, so please consult your community association manager if you have specific questions on your state’s return.
Filing a federal return requires a Form 1120, which means that an HOA has to account for all of the funds (income) it collected during the year. On some level, this makes reserve fund planning problematic. For instance, if a small amount of funds are being set aside for a project, those funds would be subjected to tax if they weren’t spent during the tax year.
That can put a serious dent in the budget planning.
Because HOAs are different then corporations, the IRS has developed Form 1120-H, a single page form that streamlines the filing process for associations.
An HOA has to formally “elect” to file Form 1120-H and has to be done so on the 15th day of the third month after the end of the HOA’s tax year. With this form an HOA need only pay taxes on non-exempt income. Non-exempt income includes:
- Rental income from an HOA owned property.
- Laundry or vending machine income.
As with any type of nonexempt tax, the HOA is permitted to make deductions with regard to expenses directly related to those items. This means paying for repair to a washing machine would be deductible. That final amount is then taxed at a flat rate of 30%.
Please note that if the HOA has paid an individual worker any amount over $600 they will need to send that worker a 1099 which applies to independent contractors.
Without that form, the HOA could become responsible for paying out payroll taxes.
This article is provided by The Management Trust.