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Federal Tax Savings for HOAs: IRS Form 1120 vs. Form 1120-H

by
Gordon W. McNamee
on
9/14/2023
Federal Tax Savings for HOAs: IRS Form 1120 vs. Form 1120-H

For homeowners' associations (HOAs) seeking to save money on taxes, choosing the right tax form can be a game-changer. While both IRS Forms 1120 and 1120-H are used for HOA tax filings, there are distinct differences between the two documents. This fact is often overlooked by HOA representatives who lack extensive knowledge of the U.S. tax code.

That's why it is important for all homeowners' associations to work with a skilled tax expert who can reduce the organization's tax liabilities. In this article, we'll discuss some of the key distinctions between HOA tax forms, and explain how opting for Form 1120 instead of Form 1120-H can potentially slash your association's tax bill by as much as 50%.

Understanding IRS Form 1120

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Credit: Andrey Popov/Getty Images

IRS Form 1120 is the standard corporate income tax return used by for-profit businesses. Choosing this form for your HOA means treating it as a regular corporation for tax purposes. While this may seem counterintuitive for non-profit organizations like most HOAs, it can yield substantial tax savings when utilized properly.

Advantages of IRS Form 1120 For HOAs

Tax Deductions: One of the primary advantages of using Form 1120 is the ability to deduct expenses more generously than Form 1120-H allows. For instance, eligible HOAs can potentially write off various operational costs, such as maintenance and repairs to neighborhood common areas, and property management fees, thereby reducing the association's taxable income.

Lower Tax Rates: Form 1120 offers a flat corporate tax rate, which is typically lower than individual tax rates. This can lead to significant savings, especially for larger HOAs.

NOL Carrybacks and Carryforwards: Net Operating Losses (NOLs) incurred while using Form 1120 can be carried back or forward to prior or future tax years to offset taxes paid in those years. This is a tax strategy that is often used to reduce a company's tax burden and could make sense for certain HOA organizations.

Tax Credits: Some HOAs may qualify for tax credits that are more valuable when using Form 1120 than Form 1120-H. 

Understanding IRS Form 1120-H

IRS Form 1120-H, in contrast to Form 1120, is specifically designed for homeowners' associations. While this document ostensibly simplifies tax filing in some respects, it also limits the association's ability to deduct certain expenses and may result in higher tax liabilities. Your group will have to work with your tax professional to determine which tax form is most beneficial in your situation.

Advantages of IRS Form 1120-H For HOAs

Simplified Filing: Because Form 1120-H is only used by HOAs, it typically involves less complex filing requirements than the corporate Form 1120.

Tax-Exempt Status: HOAs using Form 1120-H can potentially enjoy tax-exempt status on certain income, such as membership dues and assessments.

Exclusion of Exempt Function Income: Income generated from activities substantially related to the association's tax-exempt purpose is generally excluded from taxation. Your tax expert will be able to tell you more about this, as some HOAs are not eligible.

Making the Right Choice

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Credit: SDI Productions/Getty Images

The decision between Form 1120 and Form 1120-H should be based on careful analysis and professional guidance. For many HOAs, especially larger ones, opting for Form 1120 may result in significant tax savings. By maximizing deductions, benefiting from lower tax rates, and leveraging NOL provisions, some associations have reported reducing their tax bills by as much as 50% when transitioning to Form 1120.

However, it's important to note that each HOA's financial situation is unique. Factors such as size, income sources, and expenses must be considered when determining the right tax filing method for each organization. 

Working with a local tax professional who specializes in HOAs is the best way to make sure you don't miss any deductions or credits.

Feature Image Credit: Kinga Krzeminska/Getty Images

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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.

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