Homeowners association directors are responsible for the proper management of their homeowners association irrespective of whether the association has retained a professional property manager to assist in the management of the association. The management responsibilities of an associations directors includes the filing of required HOA tax returns with state and federal taxing authorities. Notwithstanding this responsibility, unknowing volunteer directors are often under the mistaken belief that, because their homeowners association is a nonprofit corporation, it is exempt from the responsibility for paying taxes and filing HOA tax returns.
It is important for homeowners association directors and management personnel to know that, even if their homeowners association has been organized as a nonprofit corporation, it is still required to file federal income tax returns each year with the Internal Revenue Service and state tax returns that are required by state taxing authorities. The federal tax returns are required to be filed within the 2 months following the end of the associations fiscal year. This obligation is set forth in Internal Revenue Code 528. The failure to file required tax returns can result in the assessment of penalties in addition to the obligation to file all prior returns that were not filed, and pay the required back taxes and interest on the required amounts.
The federal tax returns that are typically filed by a homeowners association are: (i) Federal Form 1120, which is a regular tax return for a corporation and which imposes a 15% tax rate on the first $50,000 of taxable income; or (ii) Federal Form 1120-H, which is a tax return that is designed specifically for homeowners associations and which imposes a 30% tax rate on all non-dues income (i.e. interest earnings, rental income). Copies of a Form 1120-H and the Instructions for Form 1120-H are accessible via the below links.
See: Form 1120-H and Instructions for Form 1120-H
Association directors should check with their tax advisors regarding the HOA tax returns that their particular state requires. Such tax returns are generally required to be filed at the same time as the associations federal tax return. Aside from being subject to liability for penalties, the unpaid back taxes and interest, a failure to file required state tax returns can also result in the homeowners association being suspended by the Secretary of State in which the association was organized and the loss of its powers to legally conduct business. The suspension of a homeowners association can have serious ramifications that homeowners association directors and management personnel should be aware.
See Article: Understanding The Ramifications of a Homeowners Association’s “Loss of Corporate Status”
Those who serve as directors of a homeowners association should confirm that all required state and federal tax returns for the prior year have been filed. If they have not, immediate action should be taken with the assistance of a qualified tax professional, such as a CPA who specializes in the representation of homeowners associations, to correct this deficiency.