Before the Tax Reform Act of 1976, HOAs that were not approved as 501(C) nonprofit organizations were treated as for-profit corporations for tax purposes and required to file Form 1120, a business return. Form 1120 forced payment of tax on dues and assessments that exceeded expenses for each tax year.
The Tax Reform Act of 1976, however, created Section 528 of the Internal Revenue Code and a special carve-out for qualifying homeowner associations. Section 528 defines what an HOA is for tax purposes and gives those meeting the definition the opportunity to file Form 1120-H Tax Return for a Homeowners Association. This definition has five necessary tests: 1) Exempt Purpose Test, 2) Exempt Function Income Test, 3) Exempt Function Expense Test, 4) No Private Inurement Test, and 5) Election to apply IRC Section 528 for that tax year. Your HOA must pass all five tests to file Form 1120-H for a particular tax year.
There are articles in the blog sections of Overnight Accountant that discuss other parts of this definition. Each piece draws from our course, Form 1120-H Basics which teaches HOAs to prepare their own Form 1120-H. This article will focus on test number five, election to apply IRC Section 528.
What is Section 528: As mentioned above, the Tax Reform Act of 1976 created Treasury code Section 528 was created by. This code section defines what a homeowners association is and which HOAs qualify to file Form 1120-H. Those passing the first four tests mentioned qualify as HOAs for tax purposes. There is, however, one final step that must be taken to use Form 1120-H - the HOA must elect to apply IRC Section 528 to that tax year.
Electing Section 528: Electing to apply Section 528 for an HOA is straight-forward. HOAs make the election each tax year by timely filing form 1120-H. Filing the form on time may seem like a simple requirement, and it is. But, it is a critical step which, if not followed, will disqualify the HOA from being able to file Form 1120-H. Timely filing Form 1120-H means it must be submitted by its due date, which is the 15th day of the fourth month following the close of the tax year. For most HOAs, who are calendar year taxpayers, the due date will be April 15th. For HOAs that have adopted a fiscal tax year ending on June 30, the due date is the 15th day of the third month following the close of their tax year. If the HOA files for an extension before the original due date of Form 1120-H, their Section 528 election will be honored if that file their return by the extended due date.
1120-H Extension: HOAs can file for an additional six months to file Form 1120-H by completing and filing Form 7004 with the IRS by the original due date of the return. Although the extension provides extra time to file Form 1120-H and elect Section 528, it does not provide more time to pay any tax due.
Failing to File Form 1120-H by Due Date: Homeowners associations that fail to file their returns by the due date will not be able to elect Section 528 for that tax year. This means that most HOAs will be forced to file Form 1120, a corporate tax return, for that tax year. Form 1120 is a business tax return. It is complicated and requires professional assistance to complete.
For HOA missing the filing date but able to file within 12 months of the due date (the original due date or extended due date if an extension was filed) there is a treasury procedure that will allow the Filing of Form 1120-H instead of Form 1120 provided it is followed. This procedure is a topic covered in our course, Form 1120-H Basics.
Conclusion: Form 1120-H simplifies tax filing for the vast majority of HOAs. To take advantage of Form 1120-H your HOA must pass the first four tests that define a homeowners association: 1) Exempt Purpose Test, 2) Exempt Function Income Test, 3) Exempt Function Expense Test, and the 4) No Private Inurement Test. It must then pass a final test by electing to apply Section 528 for that tax year.
Please remember that HOAs must file a tax return every year and that that the Section 528 election is made on a year-by-year basis. HOAs that do not correctly elect to have Section 528 apply for a particular tax year may have to File Form 1120 instead of Form 1120-H.
Keep Learning: We hope this article has helped you understand how to elect Section 528 for your HOA. If your HOA qualifies to file Form 1120-H and has no nonexempt income other than interest income, we invite you to learn how to prepare your own Form 1120-H. Our Form 1120-H Basics course can be used year after year to help you prepare your HOA’s 1120-H—- saving thousands of dollars in professional fees!
All courses and articles are for informational purposes only and do not constitute tax advice. Taxes are complicated - do not act on course information without consulting a professional. Always refer to treasury regulation before making any tax decision. Read the full disclaimer.
This course package is thorough and will give you a solid handle on how to optimize your business expenses to minimize your taxes and keep appropriate records to handle any IRS challenges. Only want to dive into a particular topic? Jump to that video and scan forward to where your issue is addressed. Or watch the whole series to learn it all!- Josh, Charles Town, WV, Real Estate Agent Tax-Cut Library, Agent Edition Course
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