Tax laws

New North Carolina tax laws allow for better returns for HOAs

CHARLOTTE, NC, March 27, 2022 /24-7 PressRelease/ — Some North Carolina residents who belong to a homeowners association (HOA) may find themselves with tax law issues. Some of these questions may be whether or not the HOA should file taxes, how they are affected by state franchise and income taxes, is their association exempt, and what forms need to be filed.

Fortunately, North Carolina’s new tax laws answer some of these questions and provide opportunities for HOAs to earn a better return.

First, because North Carolina HOAs must file articles of incorporation with the Secretary of State, they are considered corporations and must file taxes as all other corporations would. If the HOA has applied to be a nonprofit entity, it may be exempt. Still, the process is complicated and should be reviewed by a qualified real estate tax professional.

Then, under North Carolina law, if an HOA is comprised solely of residential properties, it is exempt from state deductible and income tax. However, if an HOA includes commercial properties, they are not exempt. The change in law has encouraged some HOAs to amend previous tax returns to include deductibles and income taxes.

HOA income consisting solely of residential properties is exempt when derived from membership dues, preservation, maintenance, management fees, association dues, fines and fees and late interest .

When filing tax returns, North Carolina HOAs have two options. The first is to file using Form 1120, the traditional business method for most HOAs. This form may be flexible regarding the allocation of expenses, but it emphasizes that HOAs maintain the 90% rule. It also benefits from a reduced tax rate of 15% on the first $50,000 of taxable income. The main drawback is that Form 1120 can be complicated to complete and the HOA may require professional assistance.

The other option for HOAs is to be taxed under IRC Section 528 and file Form 1120-H. To qualify for this treatment, the HOA must meet specific requirements. First, the annual residual income cannot be used to benefit HOA members. Second, 85% of HOA units must be residences.

Third, 90% of an HOA’s expenses must be spent on operations and maintenance, and 60% of the HOA’s revenue must come from the members themselves instead of from the sale of goods and services.

By filing Form 1120-H, most of an HOA’s income is not taxable. What remains taxable is any income from dividends, bank interest, guest fees, rental of facilities and payment of easements. Certain expenses incurred to generate taxable income may also be deducted. And HOAs have the ability to defer excess revenue to offset future costs.

There is a tie limit for filing Form 1120-H. If the HOA does not file by its due date, they get a one-year extension to make an election, but may lose the ability to file Form 1120-H that year and must file Form 1120 at the place and accept penalties for late tax payment. However, if they wish, HOAs can use this year to compare calculated costs for Forms 1120 and 1120-H and choose the form with the lower fee.

If an HOA fails to file returns, they will face penalties, interest, and preparation fees for those unfiled returns. They may also find their business charter at risk of suspension until they file all required returns.

If an HOA or other community association has questions regarding the new tax considerations and North Carolina tax forms 1120 and 1120-H, they should contact qualified experts such as those at Henderson Association Management for more information.

Founded in 1990, Henderson Properties is a family-owned real estate company headquartered in Charlotte, North Carolina. They proudly offer rental property management, community association management, home buying and selling, property maintenance and rehabilitation. Their experienced team aims to minimize the stress of running a homeowners association by working with the board in community management, collecting ratings and handling maintenance requests. In 2020, Henderson Properties renamed its community management division Management of the Henderson association to better reflect the management services of community associations.

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