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Tax exempt vs not-for- profit

By Dale Douglas Mclain posted 02-01-2019 00:48

  

One of the most common arguments I hear with regards to homeowners associations and taxes is "our homeowners association is set up with the state as a not-for-profit therefore we are a tax exempt organization."  While this is conceptually could be true, in my experience it has never been the case.  How your organization  is set up with the state rarely has an effect on how it is treated at the federal level.  The not-for-profit designation with the state filing means nothing at the federal level.  If your association was actually tax exempt you would be well aware of that fact, because the process of obtaining the tax exempt status with the IRS is time consuming and can be costly.  Usually obtaining tax exempt status for your association is not needed..  https://www.irs.gov/charities-non-profits/other-non-profits/homeowners-associations

Homeowners associations that only collect dues from their members, will likely just need to file form 1120H.  The form 1120H exempts certain types of association income, including regular member assessments, but it doesn't exempt all forms of income and it doesn't exempt an association from the requirement of filing a tax return each year.  All associations that collect assessments from members or non-members regardless of size need to file a federal tax return, whether or not they made a profit.  

If your association hasn't filed a tax return in the past, the issue becomes much more complicated.  The question becomes how do you get your association compliant again.  My advice to current board members is do what you can from today forward, because you can't always easily correct for past decisions made by prior boards.  Depending on the association's situation, I usually recommend filing the most current tax return first and then correct past issues after that.  Contact a CPA that specializes in homeowners associations if you aren't sure how to proceed.

Doug McLain
CPA
C.O.R.E. Services, LLC
dmclain@core-acct.com
360-524-9665

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03-31-2019 21:35

1. HOAs are generally not eligible as a IRS 501c3 because they do not serve the public good, rather they serve their members by managing association property for the private benefit of those owners.
2.  1120 H is the federal tax return  that an association files.  Exemption function revenue (dues) is generally tax exempt, while interest dividends and rental income from non owners,  less applicable expenses is generally taxable.  The tax rate is a flat 30% after a $100 income exemption.

03-31-2019 21:35

1. HOAs are generally not eligible as a IRS 501c3 because they do not serve the public good, rather they serve their members by managing association property for the private benefit of those owners.
2.  1120 H is the federal tax return  that an association files.  Exemption function revenue (dues) is generally tax exempt, while interest dividends and rental income from non owners,  less applicable expenses is generally taxable.  The tax rate is a flat 30% after a $100 income exemption.

03-12-2019 12:31

Thank you!  This has been an issue I wanted to research.  Now, I can check that off my list.

03-12-2019 11:51

Carol,

It is rarely a benefit for an association to apply for 501(c) status.  It costs to register and also maintaining the information may be time consuming, and usually requires additional forms to be filed with the state as well.  

If your are filing an 1120H and aren't paying much tax, I wouldn't see much of a benefit to registering as a 501(c).  The 1120H exempts regular member assessments anyway, so likely the only thing that would be taxable would be other types of income such as interest income from the bank, unless you have other ancillary operations that are run by your association.  

If you are paying taxes under 1120H feel free to give me a call if you want to go over your specific situation.

Thank you,

03-12-2019 08:41

I'm so glad you posted this.  Our association's organizational documents describe us as a not-for-profit corporation under PA not-for-profit law.  We file 1120H.  We are not 501(c), and I've wondered if we should apply to be.  Does the 1120H offer the same tax benefit?  Under what circumstances would it be beneficial for an association to pursue federal tax exemption?  Would there be additional benefits to doing so?  I would also expect greater complexity of record keeping that would need to be considered.