How does the IRS regard HOA’s?

Homeowner associations frequently function as non-profit organizations. So, how does the IRS regard HOA’s? Are homeowner associations corporations? Are HOAs required to submit tax returns and pay taxes? These are common inquiries, and if not addressed correctly, they might cause a major issue for an association.

How is HOA income taxed?
Most HOAs opt to submit Form 1120-H or 1120. Under Form 1120, the association’s entire income is taxable. Essentially, any funds collected during the year but not used (for example, funds set aside for future maintenance or repairs) will be taxed, whereas Form 1120-H only taxes “non-exempt” income, which means that only funds that are not used or earmarked will be taxed. Thus, if they qualify, HOAs often submit Form 1120-H.

Is non-profit the same as tax-exempt?
HOAs typically possess a non-profit status by default. This is because the association’s purpose is not to earn money but to maintain and govern. Being non-profit is frequently confused with being tax-exempt, which is distinct and unrelated.

Understanding Exempt and Non-Exempt Income
The IRS distinguishes between exempt and non-exempt income. Exempt income is defined as income directly relating to the HOA. As you might imagine, this primarily results from membership dues and association fees.

Non-exempt revenue, on the other hand, represents the income produced by the association when it provides non-ordinary services to its members. The most obvious examples are interest, dividends, and capital gains on money held in reserves.

But what if there’s no profit?
Even if your HOA has no excess money and is not obligated to pay taxes, you must still submit an official form to the IRS. Taxes may be complicated, especially when filing as a corporation. That’s why it is always recommended that you hire a tax specialist (CPA) to ensure that an HOA is on track and doing everything necessary to keep operations operating smoothly and lawfully.

Depending on the HOA’s annual revenue, what types of financial reports do CPA’s or tax specialists conduct?

Types of HOA Financial Audit Reports based on revenue:

Less than $150,000
HOAs with annual revenues of less than $150,000 are required to prepare a report of cash receipts and expenditures.

$150,000–$300,000
HOAs with annual revenues of $150,000–$300,000 are required to have compiled financial statements.
A compiled financial statement is a set of a company’s financial records, like an income statement, balance sheet, and cash flow statement, that have been organized and presented by an accountant based solely on information provided by the HOA, without the accountant performing an audit or review to verify the accuracy of the data; essentially, the accountant is simply compiling the information into a standardized format, NOT guaranteeing its correctness.

$300,000–$500,000
HOAs with annual revenues of $300,000–$500,000 are required to have reviewed financial statements.
Reviewed financial statements are financial statements that have been examined by an accountant for compliance with financial reporting standards. The review process provides limited assurance that the financial statements are accurate and free of material misstatements.

$500,000 or more
HOAs with annual revenues of $500,000 or more are required to have audited financial statements.
An audited financial statement is a company’s financial statements that have been reviewed by a certified public accountant (CPA) and are free of error. The CPA verifies that the financial statements are accurate and adhere to generally accepted accounting principles (GAAP) and auditing standards.