Tax Tips for HOA Community Management

HOA community management can benefit from preparing for tax season year-round.
HOA community management can benefit from preparing for tax season year-round.

Tax season happens every year, yet as the due date approaches, it can completely catch your HOA board by surprise if they haven’t been anticipating it all year. 

Taxes are one of the most important aspects of HOA management.

Some HOAs think since they aren’t operating for profit, they’re exempt from filing tax returns. This is only true for very few organizations. The IRS considers HOAs to be corporations even though most have little to no excess income each year. 

In addition to federal regulations, the state your HOA operates in will have specific tax rules for your organization to follow. Many expenses for HOA community management will be tax exempt at both the state and federal level. This means while your HOA will have to file taxes, you most likely won’t owe the IRS anything.

Clearly understanding what your HOA community management team needs to file, when its taxes are due, and the best ways to prepare for tax season will help your organization submit accurate returns with minimal stress. Every HOA will have its own way of tackling their taxes.

Tax season doesn’t have to be a nightmare. These four tips can help make it easier this year and for years to come.

Table of Contents: 

  1. Designate a Central Location for Financial Records 
  2. Maintain Accurate Records
  3. Manage Budget and Vendors Wisely
  4. Consult a Professional

Designate a Central Location for Financial Records

When HOA community management houses all financial records in one location, it's easier for all parties to begin preparing taxes.
When HOA community management houses all financial records in one location, it’s easier for all parties to begin preparing taxes.

Too many HOAs manage their organization through a cobbled-together system of Excel spreadsheets, physical ledgers, and generic accounting software. With the HOA’s finances scattered among multiple sources, it’s too easy for HOA community management to lose information, record out-of-date expenses, and lose a handle on their organization’s finances. 

It is highly recommended you use cloud-based software to manage your organization’s finances. Your HOA’s accounting software should serve as a central hub for its finances and offer robust financial reporting to analyze all aspects of it. All necessary parties need to have the ability to view, update, and analyze information as necessary. 

With the entire HOA community management team on the same page, it will be much easier to locate all of the information necessary to complete your organization’s taxes.

Maintain Accurate Records

HOA taxes are due three months after the end of your organization’s designated fiscal year, but preparing for tax season should be viewed by your organization as a year-long process. As HOAs collect and spend dues, all expenses should be accounted for, recorded, and organized. 

Since preparing taxes for an HOA are so important, you’ll want meticulous financial records to make the process as easy as possible. Plus, if you don’t have to waste time correcting bookkeeping mistakes, you can start your taxes once you’re ready. 

Exact record keeping in the present can prevent turmoil once it’s time to start preparing your HOA’s taxes. You don’t want to begin filling out the forms only to discover bookkeeping errors or discrepancies. While it could just be a small mistake, it could also take a lot of time to untangle when and where it happened. 

However, if you maintain accurate records throughout the year, you won’t have to spend time correcting your financial records. Your financial history will be ready to report to the IRS, and your HOA can direct all of its energy into submitting the taxes.

To maintain accurate records, your HOA treasurer will need to put in some regular work. Regular bank reconciliations are a good place to start. Analyzing your HOA’s profit and loss statement and balance sheet on a monthly basis will ensure the accuracy of its reported transactions. 

It’s also a good idea to use software that automatically syncs with your bank account. This means your financial records will always be updated to their most accurate versions. If your software generates reports, you will always be viewing the most up-to-date information.  

Manage Budget and Vendors Wisely

Typically, your revenue as a non-profit is tax exempt, but it is possible to owe money to the IRS if you have unrelated business income, if you need to pay property taxes, or if your HOA is generating a large surplus of funds each year. Monitor your budget carefully throughout the year to ensure you won’t have to pay the IRS an unexpected sum of money. 

Vendors will qualify as much of your HOA’s expenses. Vendors are services the HOA has purchased for the community. Your association will likely have to pay sales tax on vendor expenses, but you may be able to deduct them from your tax liability (if you have one). However, you must submit 1099s to your vendors and file these with your taxes. 

Staying on top of these will help the tax process. Your accounting software should generate your 1099s automatically at the end of the year to simplify this process.

With your budget and vendors expertly managed throughout the year, your HOA will most likely owe minimal taxes, if at all. 

Consult a Professional 

It can be beneficial for HOA community management to outsource some of the demands of tax season to a professional.
It can be beneficial for HOA community management to outsource some of the demands of tax season to a professional.

HOAs can either submit Form 1120 (for general corporations) or Form 1120-H (specifically for HOAs). While all HOAs can submit Form 1120, only HOAs that meet certain criteria designated by IRC Section 528 can use Form 1120-H. If your HOA qualifies for both forms, the IRS also allows for organizations to fill out both, identify which form indicates a lower tax liability, and submit that one. 

Each form has detailed instructions, but they should be filled out with careful knowledge and awareness of all applicable circumstances to avoid a mistake that could lead to an unanticipated audit. Your HOA Treasurer may feel confident enough in their knowledge and experience to file the taxes on their own, or you may consider enlisting the services of a professional accountant. 

It can be expensive to hire a CPA, but worth it if your HOA community management team lacks confidence in tax related matters. Using a professional accountant could save your HOA money, as they possess knowledge a layperson doesn’t. 

This is another place having a central location with accurate records will assist a smooth tax experience. You don’t want to present an accountant with messy and confusing records. The fewer questions they run into, the less you will have to pay them for their time. 

Tax season can cause a lot of undue stress each year. If you’ve kept everything organized all year, you shouldn’t be worried when tax season rolls around. 

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. 

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