Does Your HOA Have to File Taxes? A Plain-English Guide to Form 1120-H

Many volunteer treasurers are surprised to learn that their homeowners association is a taxpayer. Most HOAs are not tax-exempt charities, and most must file a federal income tax return every year, even when they owe little or nothing. The usual vehicle is a short form designed for associations: Form 1120-H.

What Form 1120-H is

Form 1120-H lets a qualifying homeowners association elect simplified treatment. Its exempt function income, mainly the dues and assessments owners pay, isn't taxed. Tax applies only to other, non-exempt income such as interest on reserve accounts, after a small specific deduction. The election is made each year simply by filing the form. The IRS's About Form 1120-H page has the current form and instructions.

The qualification tests

To use 1120-H, an association generally has to meet tests set out in the instructions, including that:

• at least 60% of its gross income is exempt function income (owner dues, fees, and assessments), and
• at least 90% of its spending goes to acquiring, building, managing, maintaining, and caring for association property.

Most ordinary residential HOAs meet these easily. Associations with significant outside income, such as renting facilities to the public, should look more carefully.

What's actually taxable

For a typical self-managed HOA, the taxable piece is small: interest earned on bank and reserve accounts, plus income from non-members such as a cell tower lease or public rentals. Form 1120-H taxes that net income at a flat rate. The alternative is filing a regular Form 1120, which sometimes produces a lower bill for associations with larger non-exempt income. That's a good question to put to a CPA.

The deadline people miss

For a calendar-year association, the return is generally due by the 15th day of the fourth month after year-end, so mid-April. Associations with a fiscal year follow the same rule from their year-end. Put it on the board calendar alongside the budget, and check whether your state requires its own return or annual report.

Don't forget contractor reporting

If the association pays individual contractors over the IRS reporting threshold during the year, it may need to issue Form 1099-NEC. Collect a W-9 before the first payment. The IRS's 1099-NEC page explains current thresholds, and our guide to getting contractor bids covers the paperwork to collect up front.

This is general information, not tax advice. Many small associations pay a CPA a modest fee to prepare the return each year, and that's money well spent. For the rest of the treasurer's calendar, start with building the annual budget.