When tax season rolls around, everyone gets to work — and your HOA is no exception. Homeowners associations are non-profit organizations. Non-profit organizations are considered a business and, therefore, obligated to file taxes like any other corporation. The process can be confusing for those who have never done it. So, here’s a guide on HOA tax returns and how you can prepare for them.
Everything You Need to Know About HOA Tax Returns
At a glance, HOA tax filing can seem complicated or hard to grasp. However, the process is quite simple and takes little time if you’ve kept good records of your finances. While you may contact a Certified Public Accountant (CPA) to make it easier for you, it’s a task you accomplish yourself.
The first thing you want to determine is whether you need to file HOA taxes or not. It’s highly likely that there’s a need to do so, but it’s a good precaution to find out for sure.
Unless your organization is grossing less than $50,000 in receipts, you are required to file HOA tax returns. Small organizations are exempt from filing a tax return, but they still need to file Form 990-N (e-postcard).
Tax Forms for HOAs
Knowing the forms you need to file can make tax time for HOAs significantly smoother. In both North and South Carolina, there are two possible tax forms an HOA can use: Form 1120 and Form 1120-H.
- Form 1120. Filing this form subjects all of an HOA’s net income to taxation. This form, used by corporations, is more complicated and involves a lot of work. It demands a more advanced level of accounting as well. On the plus side, it has a lower tax rate (15%) for the first $50,000 of net income.
- Form 1120-H. Under section 528 of the IRC, HOAs can opt to file this form instead of the first. It’s much less complicated, though it does have some specific prerequisites. To qualify, 60% of an HOA’s revenue must be from members and 90% of expenses are for maintenance and operations. Additionally, 85% of units must be residential and the annual residual income mustn’t be spent for the community members’ benefit.
When to File HOA Tax Returns
Generally, an association must file Form 1120-H by the 15th day of the 4th month following the end of its tax year. But, if an association’s fiscal year ends on June 30, it must file by the 15th day of the 3rd month following the end of its tax year. Associations with a short tax year that ends any time in the month of June should treat their tax year as if it ended on June 30. Therefore, such associations must file by the 15th day of the 3rd month following the end of its tax year.
Keep in mind that associations must file on the next business day if the due date falls on a weekend (Saturday or Sunday) or a legal holiday.
Sometimes, an association may not meet the due date for filing its forms. In that case, an association may request an extension of time to file by completing and filing Form 7004. An association must file Form 7004 by the original due date of the return.
Could I End Up Owing a Lot of Money?
Since it’s only non-member income that is taxable for homeowners associations, little to no money is usually owed. This, of course, doesn’t mean you don’t have to file HOA tax returns. If you are practicing good business, you shouldn’t have to worry about owing a large sum of money to the IRS. Other tax time issues shouldn’t be a problem either. When in doubt, it is always best to seek help from an accountant.
Don’t Forget About Audits
Should you be concerned about an audit? No. There is no federal law that requires non-profit organizations to perform independent financial audits. You may be used to performing internal audits to monitor financial practices.
And it’s possible that an application for a large amount of money from a financial institution may have prompted an audit request. However, federal law does not require it.
Required audits by the state, however, can vary. Check your audit laws by state or ask your CPA to make sure your organization is not required to conduct audits. In North and South Carolina, for instance, an audit isn’t required.
If your non-profit organization has been operating for a few years, it’s a good idea to conduct an independent audit. If your organization is well-established and has existing governing documents, you should check to see if internal and external audit regulations are already in place.
Audits are beneficial and can protect your organization in the long run. They verify your organization’s financial records, so it’s always a good practice to conduct an independent audit every few years. The cost is relatively inexpensive, and you can avoid future problems with the IRS. An independent auditor will verify such things as approved projects and bank balances.
As far as the audit costs are concerned, they can be a few thousand dollars. Smaller associations with budget constraints can look around for more affordable options. CPAs often have suggestions for independent reviews of financial records.
Reviews and Compilations
Less intense than an audit, a review is less detailed and comprehensive and does not require independent verification. The auditor will be able to determine if your organization’s financial records are sound and do not consist of any misrepresentations.
It is a good idea to have a qualified auditor — someone outside of your organization — to perform reviews and locate any concerns that may come up in an audit.
A compilation is just that: a compilation of financial statements. At the end of the fiscal year, the managers in your organization should compile their records into a format that satisfies accounting standards. Auditors use compilations to determine if financial records are free of any blatant mistakes
Compilations confirm if year-end records by management are accurate. However, they do not determine if the initial numbers collected are correct or payments made to a vendor, for example, are the same as the contract with that vendor.
Be In Control of Your HOA Tax Returns
It is important that your association considers the requirements for filing HOA tax returns and conducting audits, reviews, and compilations. A clear understanding of these subjects can make tax time for HOAs a much easier process. Failure to comply can land you in hot water with the law, in addition to incurring ample amounts of late fees (or worse).
If you need help, you can contact a CPA that is familiar with the tax laws and financial record keeping for non-profit organizations. Alternatively, you can turn to an HOA management company for assistance. Our experts can handle your financial needs, so don’t hesitate to call.
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