Additionally, this could also include capital gains and any interest you’ve accumulated over the past twelve months since the last filing. Exempt function income relates to income that is attributable to membership dues, fees or assessments of owners “in their capacity as owner-members”. Because non-exempt income relates to other types of income and includes income received from members in the capacity as “customers of services.” Let’s take a closer look at what this really means. These changes mean LLC owners must carefully weigh the pros and cons of filing Form 1120.
Exempt Expenses – First and foremost, you might have an association manager and/or secretary. Since they have the sole purpose of managing the HOA (i.e. they wouldn’t be required if the HOA didn’t exist), their salary can be included within the exempt expenses. Every day, they handle all HOA-related issues and ensure the whole process is running smoothly so this should be the first expense on your list. All homeowner associations (HOAs) must file a tax return every single year.
Introduction to U.S. Income Tax Return for Homeowners Associations
An association that doesn’t pay the tax when due may generally be penalized ½ of 1% of the unpaid tax for each month or part of a month the tax isn’t paid, up to a maximum of 25% of the unpaid tax. The penalty will not be imposed if the association can show that the failure to pay on time was due to reasonable cause. Do not enter “See Attached” or “Available Upon Request” instead of completing the entry spaces. If more space is needed on the forms or schedules, attach separate sheets using the same size and format as the printed forms. If there are supporting statements and attachments, arrange them in the same order as the schedules or forms they support and attach them last. Enter the association’s name and employer identification number (EIN) on each supporting statement or attachment.
When accountants manage to free some time during tax season, they aren’t likely to take on new clients in a new field and this leaves some people struggling. As long as you remember that you can file either form every year and you know the exempt and non-exempt income, you shouldn’t actually have a problem. Therefore, we’ve decided to break all this information down today to create the definitive guide of everything you need to know this year and the many years ahead. Not only will we cover the Section 528 requirements, we’re going to talk about Form 1120-H itself along with the instructions. We will also cover the risks of each form, exempt and non-exempt income, and some tips that’ll make the process easier. Figure taxable income using the method of accounting regularly used in keeping the association’s books and records.
What is Exempt and Non-Exempt Income?
Per the 1120-H instructions, they begin with interest income, dividends, and capital gains on association bank accounts and reserves. But they also include activities that are provided to both members and non-members in their capacity as “customers”. An example would be annual dues charged to form 1120-h all members for maintaining the HOA sidewalks.
But you must pass a few tests in order to file Form 1120H. Exempt function income includes membership dues, fees, and assessments, as well as income spent on common areas or facilities. Additionally, HOAs can receive an automatic 12-month extension from the original due date to make the election to file Form 1120-H.
Recapture of Low-Income Housing Credit and Other Tax Credits
- Accordingly, the HOA should not be taxed on any of these activities solely because the homeowners have an association formed to carry out these duties specifically on their behalf.
- What makes HOAs unique is the ability to file two different tax returns and the ability to change those forms each year.
- In fact, the HOA may consider alternating between the two forms.
- Form 1120-H is a tax return filed by certain homeowners associations (HOAs) to report income, gains, losses, deductions, credits and to figure the income tax liability.
- Otherwise, the association can go to IRS.gov/OrderForms to place an order and have forms mailed to it.
- In this case that would be managing, and maintaining and carrying for the common property of the development.
To qualify as a homeowners association, the following must apply. Accordingly, the HOA should not be taxed on any of these activities solely because the homeowners have an association formed to carry out these duties specifically on their behalf. So just like other entities, they need to do relevant tax planning in order to minimize any potential tax impact. In this post we are taking a look at the differences between filing two different forms. With property taxes, this is often where the most confusion lies because some think you can’t include one tax in a conversation regarding another tax.
- So in essence, Form 1120-H allows qualifying HOAs to report income and expenses in order to compute tax obligations to the IRS.
- All HOAs and condominium associations (whether residential or commercial) must file federal tax returns.
- An association with a short tax year ending any time in June will be treated as if the short year ended on June 30, and must file by the 15th day of the 3rd month after the end of its tax year.
- There is a one basic misconception among HOAs that file IRS form 1120-H.
- Books or records relating to a form or its instructions must be retained as long as their contents may become material in the administration of any Internal Revenue law.
- The penalty will not be imposed if the association can show that the failure to pay on time was due to reasonable cause.
- Do not attach an explanation when the association’s return is filed.
Electing To File Form 1120-H
However, it doesn’t just include the simple expenses as one might think. Essentially, the expenditure test suggests that 90% of all the HOAs expenses should go towards things that are required for the HOA itself. For example, this could be for building, acquiring, maintaining, managing, or caring for properties. If it’s a timeshare association, the expenses will need to relate to the running of the timeshare.
Where to file your taxes (for Form 1120-H)
These benefits, in effect, allow the association to exclude exempt function income (defined later) from its gross income. A homeowners association files this form as its income tax return to take advantage of certain tax benefits. These benefits, in effect, allow the association to exclude exempt function income from its gross income. A homeowners association elects to take advantage of the tax benefits provided by section 528 by filing a properly completed Form 1120-H. The election is made separately for each tax year and must generally be made by the due date, including extensions, of the income tax return. To submit Form 1120-H, homeowners associations must first complete the form by following the detailed instructions provided by the Internal Revenue Service.
The instructions also provide direction on allowable deductions, accounting methods, estimated tax payments, filing extensions, and more. A homeowners association (HOA) can elect to file Form 1120-H, U.S. Income Tax Return for Homeowners Associations, to take advantage of certain tax benefits provided under section 528 of the tax code. Like a for profit entity, an HOA can offset income with expenses incurred to generate that income. Expenses related to the production of the non-exempt income can be deducted. This would include cleaning, maintenance, state income taxes or advertising for the non-exempt income.
Form 1120-H
But even though the income from the items noted above is taxable, the HOA gets to deduct expenses as well. The HOA is able to deduct any expenses that relate to the production of this income. As soon as people see that Form 1120 offers less tax than 1120-H, they make up their mind on the spot and choose hastily.