Especially with self-managed communities, there seems to be a lot of confusion (and questions) about community association taxes and tax returns. The answers are pretty simple. The bottom line is that community associations need to file federal and state (at least in Georgia) tax returns, and most are due on March 15 each year. Most associations should also pay little to no taxes. Below you’ll find more information about what and how to file, and how to get back on track if your association has not filed returns for a number of years.
Understanding exempt and taxable income
Community associations are considered corporations by the IRS as well as the Georgia Department of Revenue. Like all corporations, associations need to file tax returns. The difference is that qualifying associations can elect to file under Section 528 of the Internal Revenue Code, which is set up specifically for associations. Section 528 exempts several types of revenue from association tax obligations, including:
- Membership dues and assessments
- Late fees and interest on those dues and assessments
- Facility rental fees, like resident clubhouse rentals
Unfortunately, some income may still be taxable, including:
- Interest and dividends from banks or investments
- Rental income paid by non-residents
- Money received for cable access agreements and cell tower leases
Even here, your association may be able to offset this income with supporting expenses such as legal fees to create contracts, common area maintenance, etc.
Special tax form available for community associations
Corporations typically file tax return Form 1120 each year. Form 1120 is fairly complex, but fortunately there’s a one-page alternative specifically designed for homeowner associations – Form 1120-H. Most associations have no problem meeting the minimum criteria to use 1120-H:
- 85% of units (meaning homes and condos) must be residential
- 60% of revenue must be from membership dues
- 90% of expenses go to the operation and maintenance of the association
The tax filing deadline is April 15 for most associations, or the 15th of the fourth month after the end of your association’s fiscal year. You can also file an extension if you won’t be able to make the deadline.
Don’t mess with the IRS
You don’t want to be remembered as the board member who caused an IRS audit. File an annual tax return, and make this an agenda item at the first board meeting of every year. If your association hasn’t filed in recent years, now is the time to catch up and file for as many years back as you have reasonable financial records. Penalties for late or missing tax return filings can be harsh, including loss of your association’s exempt income status. That means your association would pay taxes at the standard corporate income tax rates!
Find a CPA with specific community association experience to answer questions and prepare your tax forms. While the process is not difficult, using the wrong corporate categorization or tax form could cost your association thousands of dollars in unnecessary taxes. If your HOA tax return shows that your association owes a lot of income tax, please get a second opinion. This includes previous returns, as your association may be able to file an amended return to recoup the overpayment!
Neal Bach, CPA