For homeowners associations (HOAs), it can be a good thing to maintain tax-exempt status and provide financial benefits. This requires you to work by following federal and state laws.
If you are confused and want help, an expert like a North Dallas accountant who has expert knowledge in HOA tax laws can help you know about these needs in an effective way and stay safe from possible fines or the loss of exemptions.
It is important to understand these factors for HOA board members so that you can get the best out of resources and fulfill their legal duties. Here, in this article, you will learn about the important factors of HOA tax-exempt status, pay attention to its meaning, the need to qualify, and the best tips to work by obeying the laws.
What Is Tax-Exempt Status for HOAs?
Tax-exempt status for HOAs is the special tax rule that companies can qualify under the Internal Revenue Code. These exemptions are mostly granted under Sections 501(c)(4) or 528, each with different conditions.
501(c)(4) Exemption
This status helps to remember HOAs as social welfare organizations. Companies must give community interests like maintaining common areas or giving important services.
528 Exemption
This is more commonly used and mostly applies to qualified residential real estate companies that have strict income and expense distribution needs.Â
Tax-exempt status does not free HOAs of all tax rules, but it decreases responsibilities for some types of income, like dues and tests used for community purposes.
How to Qualify for HOA Tax-Exempt Status
If you want to qualify for tax-exempt status, you need to meet the needs of one of the applicable IRS sections. You also need to submit the right documents every year.Â
Meeting IRS Criteria
For Section 528, at least 85% of the money of the association must come from dues, tests, or similar sources used to take care of the property.
Filing Form 1120-H
Most HOAs seeking tax-exempt status file this form annually to declare income and expenses. Accuracy is crucial to avoid audits or penalties.
Maintaining Organizational Documents
The documents that govern Homeowners associations (HOAs), such as bylaws and articles of incorporation, must match the rules for tax exemption. Regularly keep a check on these documents and get help from an accountant with HOA experience to make sure it works by obeying the rules.
Common Compliance Pitfalls for HOAs
Even after you get the tax-exempt status, HOAs must stay careful to work by obeying the rules. Many associations face problems that can put you in a situation that harms your exemption.
Mixing Funds and Ignoring Annual Filings
HOAs must keep exempt and non-exempt income separate, like rental income or interest, to keep you safe from issues of tax responsibilities. Missing end dates for Form 1120-H or if you fail to file can lead to fines and loss of exempt status.
Improper Recordkeeping
HOAs must keep a detailed record so that they can show their obedience during audits or inquiries. An accountant can give you ongoing support by making sure that the filing happens at the right time and there is correct bookkeeping.
Best Practices for Maintaining Tax-Exempt Status
If there is early and proper management and regular checks are done, it can help HOAs to keep their tax-exempt safe over the long term.
Regular Audits
You should check your financial practices every year and the documents about your tax-exempt status to make sure that they match IRS needs.
Transparent Talk and Hiring an Expert
You should educate board members and homeowners about the responsibilities that they should fulfill with tax-exempt status. You should hire an accountant who is an expert in HOA to make sure that tax filing is done correctly and that you obey the legal rules.
Take Action to Protect The Financial Health of Your HOA
It is important for HOAs to maintain tax-exempt status to get the best from their financial resources and stay safe from fines. By getting help from professionals, associations can pay attention to their communities and make sure they obey the rules. Keep the fire of your HOA safe, and consult a professional today.
