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TAX RETURNS, DEADLINES & PROPERTY TAXES

Nonprofit vs Charitable


In California, community associations are primarily nonprofit mutual benefit corporations. Prior to changes in the tax code, homeowner associations were set up under the IRS Code as a 501(c)(7) or sometimes as a 501(c)(4) organization. Now, they primarily fall under IRC § 528, which was created specifically for HOAs. Even though they are nonprofit corporations, homeowner associations must file tax returns and pay taxes. Following is a summary of some of the more common 501(c) tax categories:

501(c)(3). Religious, Educational, Charitable, Scientific, Arts Organizations. These are public interest groups. They are exempt from taxes but limited in the kinds of political operations they can perform. Donations to these organizations are tax deductible.

501(c)(4). Civic Leagues and Social Welfare Organizations. Donations to these associations are not tax deductible. Homeowner associations that qualify as exempt organizations are exempt from income taxes, except for any unrelated business activities. See www.501c4taxexempt.com.

501(c)(6). Trade and Professional Associations (Business Leagues). These include chambers of commerce, real estate boards and the like. These organizations are specifically geared toward promoting the business interests of companies or individuals. They typically promote higher business practices and better business methods. Donations to these organizations are not tax deductible.

501(c)(7). Social and Recreational Clubs. These include college fraternities or sororities, country clubs, hobby clubs, garden clubs, recreational sports leagues, etc. Homeowner associations that qualify under this section pay taxes on net income from nonmember activities and investment earnings.

501(c)(8). Fraternal Associations. These organizations operate under a lodge system that requires a parent organization and a subordinate called a lodge, branch, or the like. It must provide for the payment of life, sick, accident, or other benefits to the members of the association or their dependents.

IRS § 528. Homeowner Associations. A homeowners association (as defined in subsection (c)) shall be subject to taxation under this subtitle only to the extent provided in this section. A homeowners association shall be consid

Property Taxes
 

Common Areas. Common area real estate owned by a homeowners association is not subject to property taxes. Taxes on common property are indirectly paid by the membership through their real property taxes. The taxable value of common areas is reflected in the increased market value of members' properties created by common area pools, clubhouses, riding trails, parks, etc. Property taxes on common areas are billed to and paid by all homeowners, not the association. (Lake Forest CA v. County of OrangeNellie Gail Ranch OA v. McMullin.) A specific code section applies Revenue & Tax Code § 2188.5 in planned developments.

Exceptions. Although associations do not pay property taxes, the County Tax Collector collects fees for special districts within the County. A standard cost is a sanitary district charge. There may be charges for other districts, such as vector control (mosquito abatement), library taxes, parcel taxes, and special district user fees levied by water districts. Contact phone numbers appear on tax bills if you have questions about the charges and whether they should apply to the common area parcels.

Income Tax Filings


Federal Taxes


Employer (Tax) Identification Number (EIN)All associations must file for an EIN with the IRS. IRS Form SS-4 is used for this purpose. IRS also has an online process on its website, www.irs.gov. This number is used in all Federal and state income tax filings. Banks will also require the number to open bank accounts. If you are a new director or manager for an existing association, you should be able to find the number on a 1099-INT issued by the bank for interest earnings or a prior-year tax return. The association’s tax preparer will have the number.

Federal Income Tax Return - Form 1120H or 1120All associations must prepare and file a tax return with the IRS at the end of each year, no matter what size. For a calendar year association (December year-end), the return is due March 15. A six-month extension of time can be obtained by filing IRS Form 7004. For many small associations, form 1120H (for homeowner associations) is used to report exempt function income (assessment) and exempt function expenses (utilities, insurance, repairs, etc.). Nonmember income, such as interest and dividends, are taxable. In some instances, the association can file form 1120. Consult a qualified tax preparation professional to determine which form is right for you.

Payment of TaxIf tax is owed on a Federal return, the tax must be remitted using the IRS Electronic Funds Tax Payment System (EFTPS). Go to www.eftps.gov to enroll in the program or make a payment. To enroll, you will need the association’s name, mailing address, and EIN. You will also need the routing number and bank account number. IRS will issue a PIN to access your account information when paying. To make a payment, you must know the tax form and the period to apply for the payment.

California Taxes


Subject to Minimum Tax. All corporations are taxable when formed in California. As such, they are subject to an $800 per year minimum tax by the California Franchise Tax Board (FTB). To obtain tax-exempt status under Revenue and Taxation Code 23701(t) (no longer subject to the minimum tax), the Association must file Form 3500 with the Franchise Tax Board. Governing documents and income and expense information are submitted to the FTB. If the association has been in existence for several years, they may request some additional information to verify that the Association qualifies as tax-exempt. If the association has tax-exempt status, it is only subject to tax on its nonmember income, such as interest, not on its assessments.

Verify if the association is tax-exemptThe FTB lists all tax-exempt corporations in California on its website. The list shows the California Corporation Number (different than the EIN), the same of the corporation, the city, the fiscal year-end, if the corporation is exempt, and whether the corporation is “active” or “suspended” by the California Secretary of State (SOS) or FTB. The list can be located using the search feature on the FTB home page.

Check to see if exempt status has been revoked. Recently, the FTB contacted many associations and other tax-exempt organizations in its database to determine if the organizations still existed. Those that did not respond to their inquiries have had their exempt status revoked. If you believe that your association had been exempt at some point and you cannot locate it on the tax-exempt list, you can check the revoked exempt organization list. If your association’s exempt status has been revoked, you must file for it again using FTB Form 3500, referenced earlier.

California Income Tax Return–Form 100If the association has more than $100 in nonmember income (e.g., interest), it is required to file a corporate income tax return with the FTB (even if it is not incorporated). Form 100 is used for this purpose, and any taxable income is taxed at a flat rate of 8.84%. Payment can be made by check, and quarterly estimates may be required in future years (Form 100-ES). I recommend that even if the association has less than $100 of nonmember income, the association should file the return anyway to stay in the FTB’s system and not have to deal with FTB correspondence later about why you didn’t file a return.

Small Tax Exempt Organizations–Electronic Return Form 199N. Tax-exempt organizations with $50,000 or less in total revenues (assessments, interest, laundry income, etc.)  must file an information return electronically each year with the FTB. Complete filing instructions and information needed can be found on the Franchise Tax Board website. There is no filing fee with the 199N filing. The return is due 4 ½ months after the end of the fiscal year (May 15 for a calendar year association). A small association can also file a paper form 199. See the following discussion.

Exempt Organization Annual Information Return–Form 199. For tax-exempt organizations whose gross revenues are greater than $50,000, a paper Form 199 is filed with the FTB. There is a $10 filing fee to remit with this form (none if less than $50,000 in revenues). The return is due 4 ½ months after year-end but is automatically extended six months if needed. If the form is filed after the extension period, the fee can increase to $65 plus interest. An association with revenues less than $50,000 can elect to file a paper 199 instead of the 199N.

Corporate Filings–California Secretary of State


Articles of Incorporation–Corp #When an association is incorporated, it submits articles of incorporation to the California Secretary of State (SOS). SOS assigns a 7-digit corporation number and returns the recorded articles to the association.

Statements of Information and Common Interest Development. Associations must file these two separate statements with the SOS every two years. The Statement of Information lists corporate officers, agents for service of process (who gets the papers if the Association is sued), and if the Association is subject to the Davis-Stirling Act (yes). A $20 fee is required. This form can be filed online. The Statement of Common Interest Development asks for information about the managing agent, the president, the number of units/lots, and the street where the association is located. There is a $15 fee to file this form, but it cannot be filed online. These forms are due at the end of the incorporation month of the association. For example, if an association was incorporated on March 6, 1984 (even year), its forms would be due on March 31 of every even year. An association incorporated on August 30, 2003 (odd year) would have its forms due on August 31 of each odd-numbered year.

The SOS usually mails out a postcard to the address on file for the Association about 90 days before the forms are due. If there has been a change in officers or management in the past two years, you may not receive the postcard. Forms are no longer mailed to the Association. Until recently, the SOS office was severely backlogged in processing these forms. Sometimes, processing these filings took the SOS 4 months or more. As of January 2014, the processing time is down to two weeks. Forms that are incomplete or not completed correctly will be returned to you for correction. Do not set these aside. Refile them as soon as possible. If there has been a change in the address, officers, or agent of service during the two years, an amended filing can be done at no charge.

The SOS forms are not tax forms. These forms are not prepared as part of the income tax return process. In most cases, the incorporation month is not the same as the fiscal year-end, so the due dates will not coincide. Since the SOS forms are due every two years and income tax returns are filed annually, there’s no correlation between the due dates. These forms can be completed by your managing agent or yourself. Your tax preparer may be able to assist.

Penalty for Failure to FileIf the association does not file the SOS statements by the due date, the SOS will impose a $50 per return penalty for failure to file. What can be confusing about the penalty is that the penalty notice comes from the Franchise Tax Board even though it is an SOS penalty. So when the notice is received from the FTB, an association may think it is an income tax penalty or fee and not realize that it is from not filing with SOS. If you receive any notice from the FTB (or the IRS), have your tax preparer review it to understand the nature of the charges. Failure to file the SOS statements can lead to Corporate Suspension. See the discussion following.

Third Party SolicitationsSome companies do mass mailings offering to prepare annual meeting minutes for the Association. The solicitation suggests that you are meeting state requirements if you use their “service.” The following is from the SOS website:

The Secretary of State’s office has been advised that solicitation letters are being sent to California businesses encouraging them to comply with their California Corporations Code filing obligations by submitting fees and documents to a third party rather than by filing directly with the Secretary of State’s office.

Misleading Statement of Information Solicitations (see Customer Alerts): Certain private companies have been soliciting business through mass mailings to corporations and limited liability companies with a solicitation similar to a Statement of Information that must be filed with the Secretary of State. These solicitations are not being made by the California Secretary of State’s office and are not being made by or on behalf of any governmental entity. Although a business entity can use an intermediary to submit filings and fees to our office, no business is required to go through another company in order to file its documents with the Secretary of State’s office.”

Tax Filing Deadlines


1.   Employment Tax Returns. (Standard deadline: 30 days after the end of each calendar quarter.) For those associations that hire employees, Federal Form 941 and California Form DE-6 are due 30 days after the end of each calendar quarter. Tax payments are due semi-weekly, monthly, or at the filing date, depending upon the amount owed. Annual tax reports (Federal W-2, 940; California DE-7) are due January 31.

2.   Federal Income Tax Returns. (Standard deadline: March 15.) All associations, no matter how small, must file a Federal income tax return two and a half months after the end of its fiscal year. For calendar year associations, the due date is March 15, although it can be extended for six months by filing an extension form (IRS Form 7004). HOAs may elect to file Form 1120H or the standard corporate Form 1120.

3.   California Income Tax Returns. (Standard deadline: March 15.) California Form 100 is also due at the same time as the Federal returns. While most associations have “tax-exempt” status with the State of California, nonmembership income such as interest is taxable. A return is required if the association has more than $100 in nonmembership income. Failure to file Form 100 when needed can result in significant penalties and interest if tax is owed and can also result in the suspension of the corporation by the state.

4.   California Exempt Organization Return. (Standard deadline: 4.5 Months after year-end.) Form 199 is required of all tax-exempt associations that receive $50,000 or more in revenue from any source (assessments, etc.) It's due four and a half months after year-end but can also be extended. A $10 filing fee is required annually. Failure to file this form when required can result in penalties plus interest. Corporate powers can also be suspended for failure to file this form. HOAs with less than $50,000 in revenue go online with the Franchise Tax Board and complete Form 199-N to satisfy their nonprofit filing requirement.

5.   Estimated Tax Payments. (Standard deadline: quarterly.) If an association pays income taxes on its nonmember income, it may be required to pay estimated taxes quarterly to avoid an estimated tax penalty. For the federal government, estimates are needed if taxes are $500 or more. The state has no minimum. With increasing interest rates, many associations will pay more this year in income taxes than in the last 2 or 3 years. Federal tax deposits are made to your bank using a Federal Tax Deposit coupon, while state taxes are paid by check and mailed using form 100-ES. Payments for calendar year associations are due April 15, June 15, September 15, and December 15.

6.   1099 Tax Forms. (Standard deadline: December 31.) Like all other businesses, associations are required to file 1099 Forms by January 31 for payments made during the previous calendar year. This is true even if the association has a fiscal year-end other than December 31. If you pay $600 or more during the calendar year to a "noncorporate service provider,” then you must issue a 1099-MISC to that service provider. Common HOA service providers include attorneys, managers, accountants, contractors, gardeners, pool service, and handymen.

Corporate service providers are exempted from receiving 1099s. But how do you tell which providers are corporate? If the business has the words “inc.” or “corp.” in its name, it is a corporation. The word “co” (for company) does not specify a corporation. The 1099 form must show the service provider’s name, address, tax identification number (social security or employer ID number), and the amount paid during the calendar year. Copies should have been submitted to all service providers by January 31 and are due to the IRS by February 28 (the delay is to allow for corrections that may arise).

7.   Independent Contractor Reporting. (Standard deadline: within 20 days of specified payments or execution of specified contracts.) California law requires businesses that use individual independent contractors to report “within 20 days of the earlier of first making payments that in the aggregate equal or exceed $600 in any year to a service provider, or entering into a contract or contracts with a service provider providing for payments that in the aggregate equal or exceed $600 in any year” to the California Employment Development Department (EDD).

This law is intended to locate “deadbeat” parents who receive payments other than wages to be able to garnish them quickly to meet child support obligations. If you use many contractors continuously, January is a good time to report them to the EDD. Reporting is done on form DE-542 and can be mailed or faxed to the EDD.

The most troublesome thing about this law (and yes, there are penalties for failure to file) is that reporting can be required anytime during the year, not just once a year or quarterly. For example, say you hire a painter on May 15 and sign a contract for a $5,000 job. Reporting would be required by June 4, even if no payments had yet been made. The reporting deadline is always 20 days after signing the contract.

8.   Secretary of State Biennial Filings. (Standard deadline: every two years.) The Nonprofit Corporation Statement of Information (SI-100) and the Statement of Common Interest Development (SI-CID) must be filed with the Secretary of State every two years. These are not tax forms, but failure to file them with the Secretary of State can suspend corporate status. Filing fees are $20 for the SI-100 and $15 for the SI-CID. Since the forms are required only every two years, the due date is tied to the association’s incorporation month, not its fiscal year. Since they are not tax forms, it is common for this filing to be overlooked if the association’s mailing address has changed. Although it is seldom done, the state allows updated forms to be filed without paying an additional fee. Fill-in forms are available online at www.ss.ca.gov.

Thank you to Michael J. Gartzke, CPA of Goleta, California, for this article.

Suspended Corporation


Failure to file tax returns can result in suspension of an association's corporate status.

Reserves as Capital Contributions


See the article by Gary Porter, CPA on the tax rules for reserve contributions by a homeowners association. 

Excess Income Resolution


See HOA obligations regarding excess income at the end of a fiscal year. 

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with community association issues, subscribe to the Davis-Stirling Newsletter.

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