HOA Tax Return Requirements and Filing Process

Homeowners associations (HOAs), while often operating as non-profits, are required by the Internal Revenue Service (IRS) to file annual tax returns. This obligation exists regardless of whether the association owes any tax. Understanding the filing requirements is a fundamental aspect of financial stewardship that ensures the association remains in good standing and avoids potential penalties for non-compliance.

Determining Your HOA’s Filing Form

An HOA’s board must first decide which federal tax form to file, a choice that directly impacts how its income is taxed. The two primary options are Form 1120-H, the U.S. Income Tax Return for Homeowners Associations, and Form 1120, the U.S. Corporation Income Tax Return. The ability to use the simpler Form 1120-H depends on meeting criteria in Section 528 of the Internal Revenue Code.

To qualify for Form 1120-H, an HOA must satisfy several annual tests. A requirement is the 60% exempt function income test, which mandates that at least 60% of gross income comes from sources like membership dues and owner assessments. Another condition is the 90% exempt function expenditure test, requiring that at least 90% of expenses be for managing and maintaining association property. The association must also be organized primarily for these purposes.

The primary benefit of using Form 1120-H is that all qualifying exempt function income is not taxed. Only the net income from non-exempt sources is subject to a flat tax rate of 30%. This straightforward approach eliminates complex calculations for associations with minimal outside income.

In contrast, filing Form 1120 treats the HOA like a standard corporation. Under this form, all net income, including excess funds from member assessments, is potentially subject to a 21% tax rate. While more complex, Form 1120 can be advantageous for HOAs with significant non-exempt income because it allows for a wider range of deductions.

Classifying HOA Income and Expenses

Properly categorizing an HOA’s financial activities is a foundational step in preparing its tax return. The IRS divides finances into two categories: exempt function and non-exempt function. This classification determines which funds are subject to taxation and is tied to the eligibility tests for filing Form 1120-H.

Exempt function income is revenue generated from membership dues, fees, and assessments collected from homeowners for the purpose of managing and maintaining the association’s property. Common examples include regular dues, special assessments for large projects like roof repairs, and late fees on overdue payments. This income is considered non-taxable when filing Form 1120-H.

Non-exempt function income encompasses all other sources of revenue. This includes interest earned on the association’s bank accounts, revenue from renting out the clubhouse to outside parties, and fees from on-site amenities like vending machines. Income from leasing property to third parties, such as for a cell phone tower, also falls into this category.

Exempt function expenditures are costs incurred for the acquisition, construction, management, and care of the association’s property. These expenses directly support the community’s purpose and include items such as:

• Landscaping services
• Swimming pool maintenance
• Security guard contracts
• Insurance policies for common areas
• Utility payments for shared facilities

Required Information and Documentation

Before beginning the tax filing process, the HOA board or its representative must gather several key pieces of information and financial documents. Having these items organized in advance streamlines the preparation of either Form 1120-H or Form 1120 and helps ensure compliance.

First, the association will need its basic identifying information, including its official legal name, physical address, and the date of its incorporation. The Employer Identification Number (EIN) is a required identifier for all federal tax filings and can typically be found on prior-year tax returns or bank statements.

The required documentation comes from the association’s financial records for the fiscal year. This includes a comprehensive income statement, also known as a Profit & Loss report, detailing all revenues and expenses. A balance sheet, which provides a snapshot of the association’s assets and liabilities, is also needed. Bank statements for all HOA accounts should be on hand to verify these figures.

Using these financial documents, the preparer must calculate and separate the key financial figures required by the tax forms. This involves determining the total gross income and then breaking it down into total exempt function income and total non-exempt function income. A similar calculation must be performed for expenditures.

Submitting the HOA Tax Return

Once the correct tax form has been selected and all financial information is entered, the final step is to submit the return to the IRS. The process involves adhering to strict deadlines, choosing a submission method, and ensuring any taxes owed are paid correctly.

The standard filing deadline for an HOA tax return is the 15th day of the 4th month following the end of the association’s fiscal year. For associations that operate on a calendar year ending December 31, the deadline is April 15. If an HOA needs more time, it can file Form 7004 for an automatic six-month extension to file, but this does not extend the time to pay any taxes due.

Associations have two methods for submitting their completed tax return. They can mail a paper copy to the IRS processing center for their location. Alternatively, they can use an authorized IRS e-file provider, which provides an electronic confirmation that the return has been received.

If the completed return shows that the HOA owes tax, payment must be made by the original filing deadline to avoid penalties and interest. Payments can be made electronically through systems like the IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS), or by mailing a check. After submission, the board should securely store a complete copy of the tax return and proof of filing for the association’s records.