Essential Tips for Proactive HOA Tax Planning
Here are some helpful tips for managing your HOA’s taxes, and why proactive planning matters.
Start by maintaining detailed records of every dollar that comes in and goes out. Reconcile your bank account monthly, keep invoices and statements, and have the treasurer verify entries. When tax season arrives, these clear records will streamline preparation, and provide solid documentation if the IRS ever requests proof.
Pro Tip 1:
Next, make this a habit:
Isolate any taxable income throughout the year.
Separate non-exempt revenue, facilities rentals, late fees, investment interest, etc, into its own account. Memos on deposits can help clarify each source. Summarize this income at every board meeting so you’re never blindsided by year-end tax liability.
Here’s what to do each fall
Take a moment to reassess which tax form makes the most sense for your HOA. Most small associations file Form 1120-H to keep dues and assessments exempt. But if your investment returns or rental revenue climb significantly, switching to Form 1120, where deductions may outweigh the flat tax, could lower your overall liability.
Pro Tip 2: Management companies like HOA Simplified can help assess the best tax form for your HOA and handle the accounting side with licensed CPAs.
Be cautious – tax rules change regularly.
Stay informed through IRS newsletters, HOA Simplified’s blogs, and more for alerts on filing requirements, UBTI rules, or form updates.
What happens if you don’t file HOA taxes?
Beyond IRS penalties and interest, your HOA could lose any tax-exempt treatment it qualifies for. Homeowners may also raise concerns about mismanagement. And in the worst-case scenario, the HOA could face legal action or struggle with unplanned tax bills, leading to sharp rises in homeowners fees.
Did you know?
The IRS can penalize 5% of the unpaid tax for each month or part of a month the return is late, and up to a maximum of 25% of the unpaid tax! So be sure to file your tax returns!
Key Definitions that might help:
Taxable Income: Income that is subject to tax, including revenue from facilities rentals, late fees, and investment interest. It must be isolated and tracked separately for proper tax filing.
Non-Exempt Revenue: Income generated by the HOA that does not qualify for tax-exempt status, such as rental income or certain fees.
Reconcile: The process of matching and confirming that the bank account balances align with the HOA's records, typically done on a monthly basis to ensure accuracy and transparency.
Tax Form 1120-H: A form designed for HOAs that helps them maintain tax-exempt status for dues and assessments, provided certain conditions are met.
Tax Form 1120: A tax form used by corporations and some HOAs for income reporting, typically chosen when investment returns or rental income exceed a threshold, as it offers deductions that may reduce liability.
UBTI (Unrelated Business Taxable Income): Income earned by an HOA that is unrelated to its primary function, which may be taxable. It's important to track and report this income accurately to avoid penalties.
Tax Liability: The total amount of tax an HOA is required to pay, which can vary based on the tax form filed and the income the HOA generates.
Penalties and Interest: Financial consequences imposed by the IRS for failing to file taxes on time or for underreporting income. Penalties can accumulate quickly, up to 25% of unpaid taxes.
Tax-Exempt Treatment: The status granted by the IRS that allows an HOA to be exempt from paying taxes on dues and assessments used for community upkeep, provided certain conditions are met.
Management Companies: Firms, like HOA Simplified, that assist HOAs with accounting and tax-related tasks, often providing expertise through licensed CPAs to ensure proper tax filings and compliance.
