Login

Homeowner Association Fees Can be Taxable on an 1120-H

There is a common misconception among homeowner and condominium associations that file form 1120-H.  They often believe that fees charged to members are not taxable.   Actually many member fees are taxable, including rental fees, parking fees, laundry fees, swimming pool fees to name a few.  In order to determine whether a fee charged to a member is taxable or not, you have to look at the “nature” of the fee.

Under treasury regulation 1.528 the IRS separates out income as either exempt function income or non-exempt function income.  Exempt function income is not taxable and non-exempt function income is taxable.  Exempt function income consists of income which is attributable to membership dues, fees or assessments of owners, “in their capacity as owner-members rather than in some other capacity such as customers for services.”  For example fees charged to members for using the laundry room facilities would be taxable income to the association, whereas yearly dues charged to all members for maintaining the association sidewalks would not be taxable.

There are cases where it might not seem so clear cut.  For example a yearly fee of $500 charged to all members for the use of the swimming pool would be exempt function income, and not taxable, but an entrance fee charged to individual members for use of the swimming pool would be taxable income for the association.  This is because the fee is charged to the members as customers rather than as owners.

To make filing your federal form 1120-H simple, it helps to separate out all the member fees between exempt function and non-exempt income.  This can be done by creating separate accounts in your accounting software, segregated by the type of income.

 

Doug McLain, CPA

 

Doug@HoaTaxHelp.com

51G979GrfsL

 

Continue Reading

HOA Hasn’t Filed a Tax Return in Years

What do you do if our HOA hasn’t filed a tax return in years?

This is easily the most common question I get from around the country.  There isn’t always an easy fix to this problem.  Many factors can dictate the proper course of action for your particular HOA when trying to catch up on past tax returns.  We will talk about one of those common situations and my recommended steps for fixing it.

Situation

An HOA with $40,000 in annual member assessments hasn’t filed taxes in 6 years.  They would have met all the conditions necessary to file Form 1120H, had they done so.  

Step 1: The first thing I would do in this situation is locate the last tax return filed.

This will give you a starting point and will help you fill out the tax returns that you will need to file.  If you are unable to locate the last tax return filed for your Association, you will need to contact the IRS to find out when the last return was filed and request a transcript of that return from the IRS.

Step 2:  File your current year tax return.

This makes sure that you stay current and don’t miss the deadline for filing as an 1120H, while trying to determine how to clean up the past years.

Step 3: Contact your local IRS office and see if they will allow for you to file 1120H for the past years. 

The biggest issue with not filing an 1120H in a timely manner is that you may no longer qualify to file an 1120H. This is because filing an 1120H is active election that needs to be made within 12 months from the due date of the tax return including extensions.   The election is only made by filing the actual 1120H form.   If a tax return was not filed within this time period then the association would have to file a regular Form 1120.  This is the main reason I suggest contacting your local IRS office, because they have allowed my clients to submit an 1120H for prior years even though they technically didn’t qualify.  There is no guarantee that an 1120H for prior years will be accepted but it is worth a shot.

Step 4: Complete all the prior year tax returns allowed and submit them to the proper IRS location.

Your local IRS office can instruct you where to send your prior tax returns. I suggest sending them all in one envelope, this will help to ensure that they get processed in the same time period.   There are many ways to fill out the 1120H for prior years, you can go to the IRS website and download the proper forms, or you can get your CPA to complete and file the forms, or you can use the HOA Tax Help website to complete prior year 1120H.

Many times board members are worried about filing a tax return for the Association if the Association hasn’t filed in the past and chose to keep ignoring the situation.  This is never your best option, as the statute of limitations for a given tax year never runs out if a tax return was never filed.  Always try to fix the situation and if you need help please give me a call.  (1-855-384-8916)

 

51G979GrfsL

Doug McLain, CPA

Doug@HoaTaxHelp.com

Continue Reading

Four Essential Reports for HOA Board Members

Unfortunately fraud and embezzlement are not confined to the for-profit sector, it often occurs in homeowner associations as well.  To often, little or ineffective oversight by HOA boards lead to embezzlement that can go on for months, or even years without anyone realizing it.  In Portland, Oregon, a management company stole from over thirty different HOAs over a three year time-span, and  no one caught it, until one of the boards went to use some of their association reserve funds and found that their reserve account was empty.  All of the theft could have been avoided if any of these boards had provided the needed oversight.

One of the best ways for boards to provide effective oversight is to have the proper reports at each board meeting.  The four essential reports that I recommend every board member should get at a board meeting are as follows:

  1. A Balance Sheet-  The balance sheet provides a picture of the financial status of an organization at a point in time.  It shows a board what it owns and what it owes.  It tells the board if it has the money on hand to meet its current obligations.
  2. An Income and Expense Statement with a Budget Comparison-  An income and expense statement shows how much it earned and what expenses it incurred for a given period of time.  Boards should ask their manager to make sure that each month they show both the actual and the budgeted expenses, as well as the difference between the two.
  3. A Statement of Aging Receivables- This statement shows the board their delinquency rate and how well the HOA is doing at collecting on those debts.
  4. Bank Statements with a Reconciliation Report Attached- The HOA manager should provide the board with a copy of its bank statement and a reconciliation report.  This will allow the board to make sure it has accurate information when making decisions.

While reports aren’t enough to prevent embezzlement from your HOA, they are a useful tool in spotting embezzlement, so it doesn’t continue on for a long period of time.  For other ways to prevent embezzlement and the number one way a board can  safeguard the HOA funds, please see my best selling book Trade HOA Stress for Success

51G979GrfsL

Doug McLain, CPA

Doug@HoaTaxHelp.com

Continue Reading

Not All Member Fees are Exempt Function Income

There is a common misconception among homeowner and condominium associations that file form 1120-H, which is, they often believe that fees charged to members are not taxable.   Actually many member fees are taxable, including rental fees, parking fees, laundry fees, swimming pool fees to name a few.  In order to determine whether a fee charged to a member of an association is taxable or not, you have to look at the “nature” of the fee.

Under treasury regulation 1.528 which is used for form 1120-H, the IRS separates out income as either exempt function income or non-exempt function income.  Exempt function income is not taxable and non-exempt function income is taxable.  Exempt function income consists of income which is attributable to membership dues, fees or assessments of owners, “in their capacity as owner-members rather than in some other capacity such as customers for services.”  For example fees charged to members for using the laundry room facilities would be taxable income to the association, whereas yearly dues charged to all members for maintaining the association sidewalks would not be taxable.

There are cases where it might not seem so clear cut.  For example a yearly fee of $500 charged to all members for the use of the swimming pool would be exempt function income, and not taxable, but an entrance fee charged to individual members for use of the swimming pool would be taxable income for the association.  This is because the entrance fee is charged to the members as customers rather than as owners.

To make filing your federal form 1120-H simple, it helps to separate out all the member fees between exempt function and non-exempt income.  This can be done by creating separate accounts in your accounting software, segregated by the type of income.

Doug McLain, CPA

Doug@HoaTaxHelp.com

 

 

Continue Reading

Fund Accounting

The fees collected by an HOA typically have two purposes:

  1. To make sure that the HOA is providing and maintaining common areas and amenities in the present.
  2. To make sure that the common areas and amenities are adequately maintained in the future.

A board which wants to avoid special assessments and understand its financial health needs to keep these two pools of money separate from each other.  Board members familiar with non-profit accounting have probably heard the term fund accounting in the past.  When an association tracks the two pools of money separately they are preforming fund accounting. Typically these separate funds of money are referred to as the operating fund and the reserve fund.

There are several reasons why an association would want to track these funds separately. Keeping the operating fund separate allows the board of an association to more accurately compare operational expenses on  a year to year basis.  It allows a board to determine if assessments are adequate to cover yearly operating expenses.  A separate reserve fund allows the board to better evaluate the adequacy of funds to pay for future expenses.  It helps to prevent over and under assessment of member dues.  It saves time in preparing the year end tax return and budget.

Although fund accounting may seem cumbersome to many associations.  Once you understand the basics it will make explanation of how the funds are spent to the association members much easier.

Doug McLain, CPA

Doug@HoaTaxHelp.com

Continue Reading

What federal tax return do unincorporated homeowners associations file?

While figuring out what the appropriate homeowners association tax return to file seems like it would be a fairly straightforward process, there are a lot of factors that go into determining the correct form for your association.  Some states including California allow for homeowners’ associations to be setup without incorporating.   These types of homeowners’ associations are considered unincorporated.

Being unincorporated at the state level does not mean you don’t have to file a federal, or possibly even a state tax return.  In fact all homeowners’ associations should file a federal tax return, which tax return that is depends on the structure and operations of the homeowner association.   For example a homeowners’ association that receives exempt status from the IRS may file Form 990.  Although, receiving exempt status for a homeowners’ association may be done, associations rarely apply for federal exemption.  A vast majority of homeowners’ associations file Form 1120-H (U.S. Income Tax Return for Homeowners Associations).   Both incorporated and unincorporated homeowners’ associations file Form 1120-H.

Continue Reading

Quick Contact


Please leave this field empty.

About HOA Tax Help

HOA Tax Help was started by 3 CPA’s who felt a need to help small associations save money by being able to prepare and file their own tax returns.

Learn More