Finance & Enjoyment Blog

Advantages in HOA Tax Reporting

Did you know a homeowner's association can retroactively change its tax status? By allowing this, an HOA can optimize their tax due to take advantage of certain rules. An 1120-H, which is exclusive to HOAs allows the organization to be taxed at a flat 30% on all regular and investment income. This can be advantageous under the right circumstances, while harmful in others.

The alternative to this type of tax status is to file an 1120 as a corporation. The lowest tax rate under this type of status is 15%, but only up to $50,000 in income. Since this is a marginal rate, it may still end up resulting in an effective tax rate lower than the 30% that is tied to the 1120-H.

In order to change the HOA's tax status, a representative must contact the IRS and ask for a private ruling on the matter. It's been discovered the IRS grants approval when an association has received bad tax advice, but this would apply to every situation since the reason for the change in tax status was due to paying more in taxes, hence bad tax advice. It's been noted that the IRS rules on this matter quickly without a need for much correspondence so it's definitely in an HOA's best interest to investigate whether or not they can benefit from this rule.

Posted in Rules and Regulations »

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