Tax season is here and many HOA’s have tax related questions. We have compiled a list of those that are frequently asked to help along the way.
Q: When does our Association have to file a federal tax return?
A: Community Associations are incorporated entities. As such, each year the Associations are required to file federal corporate tax returns by the 15th day of the 4th month following the end of their fiscal year with the Internal Revenue Service (IRS). For Associations whose fiscal year ends on December 31st, the corporate tax return is due April 15th. For an exempt organization, the due date to file is May 15th.
Q: Why does our community have to pay taxes if we are a “non-profit”?
A: Homeowners Associations are generally considered not to operate to make a profit, but rather to draw in enough income to maintain its assets and administer its activities. This is a different definition that other “non-profits” that are operated for charitable or religious purposes. Therefore, Associations do not in general pay taxes on their mandatory income (assessments), but could have other miscellaneous income (interest income, rental fees, etc.) that are taxable.
For federal tax purposes, homeowners Associations are treated as corporations. Even if an HOA was created as an a non-profit corporation with its respective state, it is still considered a regular corporation for federal tax purposes. The only exception is the rare instance in which the HOA has filed for recognition and been accepted as a nonprofit by the IRS. Such recognition is expensive, relatively difficult to obtain, and most often requested by filing form 1024 with the IRS and utilizing tax code section 501(c)(4).
Q: What form is filed with the IRS?
A: Community Associations are required to file IRS Form 1120. If they qualify, Associations can alternatively file IRS Form 1120-H, which is specifically designed for homeowners Associations. Either form may be filed if the Association qualifies to file IRS Form 1120-H. Generally, the form that results in the lowest tax will be filed. Exempt organizations must file the 990 Form.
Q: If taxes are due, how do the taxes get paid?
A: The IRS has implemented a payment system to be used to submit and process payments. The Electronic Federal Tax Payment System (EFTPS®), a free service of the U.S. Department of the Treasury. Audit/Tax Service Group will enroll the entity and submit any tax payment on/before the tax payment due date, the 15th day of the 4th month following the end of the Fiscal Year. (If the fiscal year end is 12/31, the due date is 4/15 of the following year)
Q: If an extension is filed, when is it filed and are there penalties?
A: Form 7004 is filed on/before the initial due date of the return. There is no penalty for filing an extension. Many corporations use the extension to provide them enough time to complete their annual financial statement consolidation and review process. Form 7004 is filed directly with the IRS by the CPA firm. The extension is for an additional 6 months to submit the tax return.
Q: Who prepares the tax returns for my community?
A: If your HOA’s management company has an Tax/Audit group, they will make contact with CPA firms on behalf of your Association who are experienced, knowledgeable of federal and state income tax laws for homeowner Associations and appropriately licensed in their respective states. Typically, this group will facilitate any communication that needs to occur between you and the Association’s CPA firm.