Some Very Basic Things to Know About HOA Income Taxes

By William S. Erlanger, CPA
Levy, Erlanger & Company LLP, CPAs 
(This article was previously printed in The Communicator, Volume 12, Issue 3) 

Not all homeowner associations file the same federal or state income and/or information returns. A homeowner association might be filing its federal income taxes on a Form 1120, Form 1120-H, Form 1120-H as a timeshare, Form 1120-C, Form 990 and/or Form 990-T. If that is not confusing enough, California also has different returns that a homeowner association might be using: Form 100, Form 199, and Form 109. 

California requires that homeowner associations electronically file all returns, while the IRS permits electronic filing, but only for certain returns. Oddly enough, while it requires electronic filing of returns, the state does allow mailing of checks for balance due or estimated taxes. The IRS, however, requires that almost all payments be made electronically.

Since Congress set about to tax corporations back in the 1900s, corporate tax returns were required to be filed by the 15th day of the third month after year end. In other words, the due date was March 15 if the corporation’s year-end was December 31. Homeowner associations are corporations, whether incorporated or not, for income tax purposes. It was not until 1985 that Congress carved out a different set of optional rules for certain homeowner associations that wanted to use them. If an eligible homeowner association made an election, how its taxable income was computed was different from that of a regular corporation. The tax rates changed, as well, and Form 1120-H was born. A little later timeshares were added to the 1120-H allowable list.

For unclear reasons, beginning in 2016 the filing dates were extended by one month. Generally, the filing date is now April 15, and California usually goes along with the federal rule changes.

Are the tax rates the same on all federal Forms? No and glad you asked, they are not. Here is a rate chart.

Federal Form: 

1120                                         21% of taxable income

1120-H                                     30% of taxable income

1120-H timeshares                32% of taxable income

1120-C                                      21% of taxable income

990-T                                         21% of taxable income

The state tax rate is the same regardless of the form used: 8.84% of taxable income.

Not all taxable income is the same either, depending on which federal tax form is used. Form 1120-C is for cooperative housing corporations (Coops). Some older and larger associations file federal returns on a Form 990 information return and a Form 990-T to report taxable income.

About four years ago, the Franchise Tax Board (FTB) required that all Form 100 and Form 199s be filed electronically (e-filed). This pretty much means that an association needs to have a CPA prepare its tax returns. The FTB did, however, allow associations to get a waiver from this requirement; it was automatic - all an association was required to do was inform the FTB that it would be paper filing. The FTB now requires that an association formally request to paper file and give reasons why the returns could not be e-filed.

The IRS, while not requiring e-filing, will accept electronic filing of Forms 1120 and 990. They will not currently accept Forms 1120-H, 1120-C or 990-T for electronic filing. However, it is likely in the near future that the IRS will require that all returns that might apply to a homeowner association be e-filed. If a return is going to be e-filed, a CPA will probably need to prepare it.

The process of e-filing is fairly straightforward. The CPA prepares the returns and sends them to the client. The returns are "file copies" since the paper is not going to be mailed to anyone. This is, of course, based on the association not using the Form 1120-H. Along with the tax returns, the association gets IRS and FTB forms that need to be signed and returned to the CPA. These forms are the permission slips to e-file the returns. So, when the CPA gets back the signed permission slips, he/she e-files the returns. Remember that payments are separate from filing.

When something is sent certified mail to either the IRS or the FTB, proof of receipt is given. Unfortunately, when tax returns are e-filed, neither the IRS nor the FTB provide authoritative documentation that they have received the returns sent to them.

Probably the most frequent trouble HOAs have with the taxing authorities is when the FTB, in collaboration with the Secretary of State, suspends the corporate status and, in a related move, the FTB revokes the HOA’s exempt status. The FTB can suspend the corporate status and revoke the exemption of an HOA if they’ve warned an HOA several times to file something, pay something, or both, and nothing was done.

First, let’s clear up a very common misconception. In many people’s minds HOAs are automatically exempt from income tax. They might think this because their association’s articles of incorporation say that the association is incorporated as a California nonprofit mutual benefit corporation. But, no entity is tax exempt unless the IRS and/or the FTB say so (a slight oversimplification), and 99.9 percent of homeowner associations do not have an IRS and/or FTB notice saying that they have approved exemption from tax.

Any entity that incorporates in California must annually pay a minimum tax of $800. This exemption is only from the $800 per year minimum tax. The association needs to be primarily residential in the units that make up the association in order to get this exemption. Once approved, the exemption is permanent unless you run afoul of the FTB and/or Secretary of State, resulting in revocation of the exemption.

Finally, I would like to share a very important phone number: (916-845-4171 × 3 × 0). This is the FTB’s Exempt Organization Unit. They answer the phone from 7:00 a.m. to 4:30 p.m. Monday through Friday. Occasionally, you may have to wait 10 minutes to get through to a "live" person, but you will speak with someone who will be able to answer questions such as: "Why am I getting this notice?", "I made a payment, but why aren’t you showing it?", "Why was the corporate status suspended?", "Why was the exemption revoked?" and so on.

Bill is a partner in the CPA firm Levy, Erlanger & Company LLP located in San Francisco and is past President of the Bay/Central Chapter of CAI.