Homeowners Associations (HOAs) often face the challenge of determining which tax form to file: Form 1120-H or Form 1120. The choice between these two forms depends on the HOA’s unique characteristics, particularly the nature of its income and expenses. Filing the correct form can help minimize tax obligations and simplify compliance with IRS regulations.
In this blog, we’ll explain the purpose, advantages, disadvantages, and eligibility criteria for Form 1120-H and Form 1120 to help your HOA make an informed decision.
Form 1120-H: The HOA-Specific Tax Form
Form 1120-H is specifically designed for qualifying HOAs, making it the preferred option for many associations. This form benefits HOAs primarily receiving income from “exempt function income,” which includes fees for maintenance and management services provided to the community.
To qualify for Form 1120-H, your HOA must meet the following criteria:
- Must be residential in nature (85%)
- At least 60% of the HOA’s gross income must come from exempt function income.
- At least 90% of the HOA’s expenses must be for managing or maintaining the property.
Exempt function income can consist of membership dues or assessments collected from owners. It is important to note that this income must come from the members in their capacity as owners.
Advantages & Disadvantages of Form 1120-H:
Advantage
Disadvantage
Form 1120: The Corporate Tax Form
While corporations typically use Form 1120, it can also be filed by HOAs that do not qualify for Form 1120-H. Although more complex, Form 1120 offers lower initial tax rates and allows for deductions that may benefit larger HOAs or those with more varied sources of income.
Advantages & Disadvantages of Form 1120:
Advantages
- Lower initial tax rate: The first $50,000 of net income is taxed at 15%, which can result in significant savings for HOAs with taxable income.
- Easier to qualify: HOAs with varied income sources may find it easier to file Form 1120.
- Net Operating Loss deductions: HOAs can carry forward losses to future years to reduce taxable income, which is not an option with Form 1120-H.
Disadvantages
Filing Deadlines
Due on the 15th day of the 4th month after the end of the HOA’s tax year, typically April 15 for calendar-year HOAs. An automatic six-month extension can be requested by filing Form 7004.
Also due on the 15th day of the 4th month after the end of the corporation’s tax year. For HOAs that operate on a calendar year, this means a filing deadline of April 15. Like form 1120-H, Form 1120 filers can also requesti a six-month extension by submitting Form 7004.
Which Form is Right for Your HOA?
Choosing the correct form can significantly impact your HOA’s tax liabilities. For expert advice on HOA taxes, please consult us at Avizo Group. Our team of tax professionals can help guide your HOA through the complexities of Form 1120-H or 1120 and ensure compliance with IRS rules. Working with a tax professional can ensure your HOA makes the right decision based on its specific circumstances, leading to better tax management and reduced risks.
Carly Corte, MACC
Carly is a Strategic Analyst who excels at performing internal control analysis, audits, compilations, and reviews for small businesses, government agencies, 401(k) plans, and non-profit organizations.
