You may have heard rumors that because your community association is a non-profit organization, you are not required to file a tax return. Unfortunately, that is not the case. Even though your association may not owe any taxes, you still need to file federal and state (as applicable) tax returns. While property management companies have this covered, this tends to be more of an issue among self-managed communities. Let’s break down the reasons why community associations need to file tax returns, and how to get caught up if you haven’t.
Understanding exempt and taxable income
The IRS and most states (including Georgia) consider community associations to be corporations. State statutes (like in Florida) and the association determine the obligations to organize as a nonprofit or for-profit entity. Like all corporations, associations still need to file tax returns. The difference is that qualifying associations can elect to file under Section 528 of the Internal Revenue Code, which exempts several types of revenue from association tax obligations. Exemptions include:
- Membership dues and assessments
- Late fees and interest on those dues and assessments
- Facility rental fees, such as resident clubhouse rentals – to residents!
Unfortunately, some income may still be taxable, including:
- Interest and dividends from banks or investments
- Rental income paid by non-residents, such as the use of the clubhouse, boat dock rental, or RV storage space
- Money received for “right-of-way” deals like cable access agreements and cell tower leases
The good news is that your association may be able to offset at least some of that taxable income with supporting expenses, such as legal fees to create contracts, common area maintenance, property management, etc.
Special tax form available for community associations
Corporations typically file Form 1120 each year, which is fairly complex. Fortunately, there’s a one-page alternative specifically designed for HOAs and condo associations—Form 1120-H. Cooperative associations have their own tax form, Form 1120-C.
You should contact an experienced CPA (like us!) to determine if your association qualifies for the special form, and whether a state return is also required. Tax returns are typically due April 15 (April 18 in 2023), or the 15th day of the 4th month after the end of the association’s tax year. Act now to make sure you are in compliance.
Is your association behind in filing?
What if your association hasn’t filed tax returns in a while—or ever? Don’t panic! An experienced CPA can help you get back on track. You don’t want to be remembered as the board member who caused an IRS audit. 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 (typically 3-5 years works). A CPA can help get you caught up and may be able to get late filing penalties waived or reduced.
Don’t mess with the IRS! Contact us today!