Small HOA Taxes
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SMALL HOA TAX CONSIDERATIONS

INCOME TAX FILINGS

FEDERAL

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 1120. All associations, no matter what size, must prepare and file a tax return with the IRS at the end of each year. 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, it is possible for the association to file form 1120.  Consult with a qualified tax preparation professional to see which form is right for you.

Payment of Tax. If 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 making a payment. To make a payment, you will need to know the tax form and period for the payment to be applied to.

CALIFORNIA

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 (R&TC) 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 is 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, then it is only subject to tax on its nonmember income such as interest and not on its assessments.

Verify if association is tax exempt. The FTB has a list on its website listing all tax-exempt corporations in California. The list shows the California Corporation Number (different than the EIN), the same of the corporation, the city, the fiscal year-end, what R&TC is corporation is exempt under and whether the corporation is “active” or “suspended” by the California Secretary of State (SOS) or FTB. See discussion of suspended corporate status following. The list can be located using the search feature on the FTB home page (www.ftb.ca.gov) or by accessing the following link directly: https://www.ftb.ca.gov/businesses/Exempt-organizations/Entity-List.shtml.

Check to see if exempt status has been revoked. Recently, the FTB contacted many associations and other tax-exempt organizations in its database in an effort 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 at: https://www.ftb.ca.gov/businesses/Exempt-organizations/Revoked-Entity-List.shtml. If your association’s exempt status has been revoked, you will need to file for it again using FTB Form 3500 referenced earlier.

California Income Tax Return–Form 100. If the association has more than $100 in nonmember income (e.g. interest), then 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 which have $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 discussion following.

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. Every two years, Associations are required to file these two separate statements with the SOS. The Statement of Information lists corporate officers, agent for service of process (who gets the papers if the Association gets 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, President, the number of units/lots and the streets 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 31st of every even year. An association incorporated on August 30, 2003 (odd year) would have its forms due on August 31st of each odd numbered year.

The SOS usually mails out a postcard to the address it has 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. In some cases, it took the SOS 4 months or more to process these filings. 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-year period, 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. The incorporation month is not the same as the fiscal year-end in most cases 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 of the due dates at all. These forms can be completed yourself or by your managing agent. Your tax preparer may be able to assist.

Penalty for failure to file. If 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 discussion following.

Third Party Solicitations. Some 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 is required to 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.”

Thank you to Michael J. Gartzke, CPA of Goleta, California, for this article on small association taxes.

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

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