Income Taxes. Even though associations are nonprofit and generally not subject to property taxes, they must file income tax returns both with California's Franchise Tax Board (FTB) and with the Federal Internal Revenue Service (IRS) and, if necessary, pay taxes. (Internal Rev. Code 528).
Minimum Annual Tax. Incorporated community associations must pay a minimum annual corporation tax of $800 unless receive an exemption by filing FTB Form 3500. If granted, HOAs are still required to annually file Form 199 and pay taxes on net nonmember income.
Failure to Pay. Current boards are not relieved from their duty to file tax returns even if prior boards failed to file them. Failure to file returns can result in penalties, back taxes and interest.
Tax Forms. Following are typical tax forms for homeowners associations.
Federal Form 1120. This is a regular corporate filing with a 15% tax rate on the first $50,000 of taxable income. The return is more difficult to prepare and requires associations to use more restrictive accounting procedures during the year. It also has a higher audit risk and tax resolution may need to be approved by the membership.
Federal Form 1120-H. This filing is specific to associations, is easier to prepare, and has a lower audit risk. It applies a 30% tax rate to all non-dues income (interest earnings, laundry income, rental income, etc.). This filing does not require an excess income resolution. Even so, many associations routinely include the resolution on their annual ballot thereby giving their CPA the flexibility to file either tax form.
California Form 100. If an association has more than $100 in non-membership income, a return must be filed with the State at the same time as the Federal filing. Failure to file Form 100 can result in the suspension of the corporation.
When to File. Tax returns must be filed within 2 1/2 months of the end of the association's fiscal year. The deadline may be extended for six months by filing the appropriate form.
Recommendation: Boards should seek the advice of CPAs who specialize in HOAs when it comes to preparing and filing the association's income tax returns.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.