Tax Time is Near! An HOA Bookkeeping Service Will Make Things Simple

School is out, the pool is open, and summer vacations are beginning. But, if you’re a treasurer of an HOA, you’re preparing for a new fiscal year. Hiring an HOA bookkeeping service will allow you to enjoy the best summer with your friends and family. 

Volunteering as a Treasurer for an HOA comes with huge responsibilities, especially around tax time. Staying organized and accurate throughout the year will make the end of the year as smooth as possible. Associations with fiscal years ending June 30 must file their taxes by the 15th day of the third month after the end of its tax year. 

Here are some tips to prepare you to file your homeowners association tax return:

Prepare your Documents

As an HOA, you have some flexibility in your filing, and with each choice comes pros and cons. Most HOAs can choose between Form 1120 or Form 1120-H for homeowners association tax returns.

Benefits of filing Form 1120 H:

• Form 1120 H consists of one page compared to the six-page Form 1120.
• Form 1120 requires unspent income, including a reserve fund, to be taxable. 

However, Form 1120 H has a higher tax rate than Form 1120. In addition, to file Form 1120 H, your association must meet these requirements:

• No individual monetarily gains from the association’s earnings except through acquiring, constructing, maintaining, managing, or caring for the HOA’s properties or through a refund of dues or fees.
• At least 60% of gross income is exempt from taxation. This can include income from membership fees, sales, rentals, etc.
• At least 90% of expenses are used for acquiring, constructing, maintaining, managing, or caring for HOA properties. 

Depending on what state your HOA operates in, you may need to file a form for state taxes also. 

Consider your annual income and expenses to determine what form suits your association. Gather all necessary documents for review, including financial statements and bank account information. This can be challenging, as the correct records are not always easily accessible, and those that are aren’t always intuitive to people who aren’t financial experts.

It’s crucial to check that all financial documents are up to date and complete. Any discrepancies can lead to issues with your homeowners association tax return.

Calculate Total Income and Expenses for the Year

The next step is to review income and expenses from the previous year, ensuring that all transactions are accurately accounted for. This process involves an understanding of complex financial transactions and accounting principles. 

Most importantly, you’ll want to be able to separate exempt and non-exempt income. 

Exempt income is earnings directly related to the HOA. For most associations, the majority of this will come from membership dues and fees. 

Non-exempt income consists of profits from providing services beyond the ordinary to members or the general public. For example, your association may have a swimming pool or golf course with a fee for the public. The money earned from those fees would qualify as non-exempt income. 

An HOA can deduct its direct expenses related to the creation of taxable income. But, with indirect costs, it’s more complicated. Section 528 allows HOAs to allocate expenses related to exempt and non-exempt income on a reasonable basis, but this can affect the association’s eligibility to file Form 1120-H. 

An HOA bookkeeping service can help you navigate these murky waters and even prep and file your association’s taxes for you to ensure you get your largest return while satisfying the IRS’s requirements.

Review all Applicable Taxes and Fees Levied by the Governing Municipality

There are multiple levels of taxation for HOAs, making it challenging to understand the taxes and fees applicable to your HOA. 

Tax requirements will vary depending on the county and state in which the association operates. In addition to filing a federal tax return, you may need to file a state tax return. Complete this research far ahead of the end of the year to allow yourself plenty of time to complete all required documents.

Ensuring all taxes and fees are accurate is crucial to avoid trouble with local agencies or the IRS. Also, the members of your HOA count on you to accurately and carefully manage the financials of the association. By completing everything in a proper and timely manner, you maintain the trust homeowners have put in you for caring for the homeowners association’s future. 

Ensure all Necessary Tax Forms are Completed and Filed

Once you decide which federal form is right for your association and confirm the necessary documents for the municipality in which the HOA operates, you can get to work on filling out your homeowners association tax return. 

Completing the homeowners association tax return can be a headache. It requires a deep knowledge of the HOA’s financials. It’s critical to complete each form accurately and on time. Start early on your tax forms, as you may need additional time to track down information or get your questions answered. 

File Necessary Forms with IRS and Local Agencies 

Finally, once you’ve completed all the required forms correctly, you’ll want to file them with the IRS and your state and local agencies.

The IRS does not allow for Form 1120 H to be filed electronically, so you’ll want to allow time for your form to be mailed. Check your local and state agencies to see how they require documents to be submitted. Select tracking on your homeowner’s association tax return to ensure it is received, processed, and accepted. This way, you can address issues immediately and avoid not becoming aware of them until it is too late. 

Homeowners Association Tax Returns Made Simple

Tax preparation is a complex process, and it’s even more nuanced for an HOA. Failure to properly prepare and file documents can lead to time-consuming and nerve-wracking audits, hefty fines and penalties, and loss of faith in HOA management from residents. But you don’t have to lose sleep preparing your homeowners association tax return or worrying that it was done incorrectly. 

PayHOA’s HOA accounting software makes managing your finances easier year-round and ensures everything is correctly prepared for tax time, handling discrepancies throughout the year. 

Our bookkeeping service can do the heavy lifting for you when it’s time to file taxes. We inform you of your eligibility and what filing each form would mean for your association. With real human support, our team and your volunteers can decide together which route your association should take. We can even prepare the federal and state forms for you.

Our experts have experience in all 50 states and understand the unique requirements for filing taxes in each one. We’ve seen every kind of situation and can make the best decision for your HOA. We treat all of our clients’ associations like they are our own neighborhoods and homes. Set up an introductory call today to learn how PayHOA can take over your HOA’s finances so you can enjoy your summer without worrying about your homeowners association tax return. 

PayHOA offers an HOA management software solution for HOAs of any size or managerial priorities. To find out if PayHOA fits all your HOA management needs, try our software free for 30 days.