Tax Planning

A Guide to IRS Reporting for Homeowners' Associations

A Guide to IRS Reporting for Homeowners' Associations

Homeowners' Associations (HOAs) play a crucial role in managing and maintaining residential communities around the United States. These organizations are subject to specific IRS reporting requirements. Understanding these requirements is essential for HOA boards and management to ensure compliance and avoid potential penalties.

One of the main regulations of IRS reporting for HOAs is the filing of Form 1120-H, which is designed specifically for HOAs and provides a simplified method for reporting their income and expenses. To be eligible to file Form 1120-H, an HOA must meet certain criteria outlined by the IRS.

One of the primary requirements for eligibility is that at least 60% of the association's gross income must consist of exempt function income. This includes income derived from sources such as membership dues, assessments, and fees related to the association's exempt purposes, such as maintaining common areas and amenities -- like clubhouses or playgrounds -- within the community.

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Credit: Annebel van den heuvel/GettyImages

Additionally, the HOA must provide significant services or facilities for the benefit of its members, such as road maintenance, landscaping, or security services. The association must also operate primarily to benefit its members rather than to earn a profit. While this describes the majority of homeowners' associations in the U.S., it is important for board members to work with a tax professional to determine their status.

For qualifying organizations, Form 1120-H makes it easy to take advantage of certain tax benefits, such as a flat tax rate of 30% on their taxable income, rather than the potentially higher corporate tax rates that would apply if they were to file Form 1120.

It's important for HOAs to keep accurate records of their income and expenses throughout the year to facilitate the preparation of Form 1120-H. This includes maintaining detailed financial statements, invoices, receipts, and other relevant documentation.

Another form that HOAs might be required to file is Form 1120, the standard corporate tax return form used by businesses subject to taxation as corporations. HOAs that do not meet the criteria for Form 1120-H or that choose to be taxed as regular corporations may need to file Form 1120 instead. This form requires detailed reporting of the HOA's income, deductions, credits, and tax liabilities, and may involve more complex tax calculations compared to Form 1120-H. Again, HOA board members must carefully evaluate their tax status and consult with a tax professional to determine the appropriate tax filing requirements for their situation.

In addition to filing the forms outlined above, HOAs may also be required to file other tax forms depending on their specific financial activities. For example, if an HOA earns more than $600 in non-exempt income from sources such as interest, dividends, or rental income, it may need to file Form 1099-MISC to report this income to the IRS and to the recipients of the income.

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Credit: SDI Productions/GettyImages

Overall, understanding and complying with IRS reporting requirements is essential for HOAs to maintain their tax-exempt status and avoid potential penalties. By staying informed and working closely with tax professionals or accountants familiar with HOA taxation, HOA boards and management can ensure that their association remains in good standing with the IRS.

Feature Image Credit: Andrey Popov/GettyImages

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Gordon W. McNamee

Gordon W. McNamee

Gordon W. McNamee is a Certified Public Accountant (CPA) based in Rancho Cucamonga, CA. Gordon W. McNamee can assist you with your tax return preparation, payroll, accounting and tax planning needs. <br /> <br /> 2021 is Gordon W. McNamee, CPAs 38th year in the profession. As as a former IRS agent (1984 through 1987), Gordon has been in public accounting since 1987. Gordon specializes in individual, corporate, HOA, trust, estate and payroll taxes. He also prepares financial statements and provides accounting & bookkeeping services. He enjoys making his clients feel at ease while providing a personalized professional service.

GORDON W. MCNAMEE, CPA
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