By law, a homeowners association is a nonprofit corporation, and it’s expected to record all financial transactions that take place during the fiscal year. The right HOA accounting software can help the Treasurer move through tax season easily and efficiently.
HOAs are usually tax-exempt, but the IRS still expects them to file taxes every year. States also have their own filing requirements.
If you’re meticulous by nature, taking care of your HOA’s taxes might be a breeze. But if you’re the kind of person who always did your homework the night before it was due, you might want to think about making some changes. The best way to be ready at tax time is to take many small steps throughout the year to prepare:
- Designate a central location for financial records. A cobbled-together system can cause unnecessary headaches.
- Maintain accurate records. By comparing your HOA’s financial reports to your bank statement each month, you catch potential errors and prevent bigger problems.
- Manage vendors wisely. Many HOA expenses involve vendors, so keep careful track of all expenditures.
- Consult a professional. A certified public accountant has trained to deal with tax issues and can support an HOA team that lacks confidence when it comes to dealing with the IRS.
Homeowners associations are expected to file two types of tax forms: 1120 and 1099. If that was the end of it, the life of an HOA Treasurer would be much simpler than it actually is.
However, it might be beneficial for an HOA to file form 1120-H instead of 1120. And when it comes to 1099 forms, there are choices to make about which version to file.
The U.S. tax code can seem like a maze designed to deliberately frustrate and confuse. However, HOA treasurers around the country do what they have to do every year. If they can do it, so can you.
Forms 1120 and 1120-H
IRS form 1120 is for corporate income tax returns, while form 1120-H is specifically designed for homeowners associations. Associations may file either one, and the IRS allows you to file the one that results in the lowest tax burden.
The IRS considers homeowners associations to include condominium management associations, residential real estate management associations, and timeshare associations that are separate from condominium associations.
To be treated as a homeowners association, the HOA must file form 1120-H. To quality, the following rules must apply:
- more than 60% of the annual income of the association comes from sources such as membership dues, fees, interest, or special assessments
- 90% or more of these funds are used for the maintenance or addition of the property itself
Form 1120-H is a relatively straightforward tax form, and simpler than form 1120, so there is less risk of filling it out incorrectly. If your HOA files the 1120-H, it doesn’t have to pay the alternative minimum tax.
However, form 1120-H has some drawbacks. Income is taxed at 30 percent for an HOA or condominium association. In addition, HOAs can’t claim a net operating loss on form 1120-H, and organizational costs are not tax deductible with the form.
Again, the tax code can seem to twist and turn for the uninitiated. A CPA can provide guidance about which form to file, but there are some general guidelines for when 1120-H would be a smart move:
- Taxable income is $100 or less (the standard deduction).
- Taxable income is approximately $186,000 or greater. In this situation, the 30% tax rate on form 1120-H results in a lower overall burden than with form 1120.
- The difference between the two forms is too small to risk filing the more complicated form 1120.
- HOA is not in compliance with the IRS tax code and is unable to file form 1120.
- 1120-H may result in lower taxation than the alternative minimum tax required with form 1120.
- Total tax liability is lower when considering HOA taxes at the state level.
When there are so many contingencies to consider in order to stay on the IRS’ good side, it’s important to have a good system for keeping track of your HOA’s financial information.
Robust HOA accounting software allows you to escape the burden of paperwork, creating an easily searchable digital database. There’s no need to dig through manila folders, envelopes, and, in some cases, paper bags to find what you need to fill out the necessary forms.
Homeowners associations also have to be familiar with form 1099, which is recorded income that isn’t part of a person’s wages from a full-time job. If your HOA deals with small businesses or self-employed contractors, then you’re expected to provide the worker and the IRS with 1099s for tax purposes.
There are a variety of 1099s, but two concern HOAs:
- Form 1099-MISC (miscellaneous information) is for payments of $600 or more to cover rent, attorney payments, or other payments.
- Form 1099-NEC (non-employee compensation) is for payments of $600 or more for services performed by non-employees and attorney payments.
For years, the 1099-MISC was a catch-all, but it’s being replaced by the 1099-NEC. In 2020, the IRS re-introduced the 1099-NEC for companies to report payments to people who did paid work but weren’t employees. If the person painting the clubhouse was a freelancer, self-employed, or working a side gig, you’re expected to send the 1099-NEC.
Work that could require a 1099-NEC includes:
- Repairs, maintenance, and handyman services
- Filling potholes
- Sealing roads and parking areas
- Snow removal
- Painting common areas
- Web design and maintenance
- Accounting and bookkeeping
- Consulting and legal services (note: payments to attorneys can be complicated)
- Payments to board members for services
- Computer repair and maintenance
- Landscaping and lawn maintenance
If you don’t have any experience with 1099s, it might be worth the time to speak with your accountant to make sure you’re following the correct procedure. It can get confusing, especially since special rules exist for:
- Payments made by credit card
- Equipment rentals that include an operator
- Fees for services related to the purchase of physical goods
The forms might be difficult to figure out for a first-timer, but at least it’s easy to get the forms you need. High-quality HOA accounting software should be able to generate your 1099s automatically to add at least a bit of simplicity to your HOA’s yearly tax process.
By the way, your HOA should mail 1099s out to workers by Jan. 31. The IRS also should get a copy sent out by that date.
HOA accounting software
To take some of the hassles out of preparing for tax time, consider investing in HOA accounting software for your association. PayHOA makes it easy to keep track of
- Dues invoicing and collection
- Financial reports and accounting documents
- Board meeting minutes
- Vendor contracts
With PayHOA, every day is an opportunity to prepare for tax time, so a series of small actions can have a big impact on your peace of mind. PayHOA accounting software can be available for as little as $49 a month for a self-managed board. It’s a small price to pay to turn piles of paperwork into easily searchable digital files that can be ready whenever you need them.
HOA accounting software can’t simplify tax forms, but it can simplify the process of gathering all the information you need to fill in those forms and reduce your frustration levels at tax time.
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.