New North Carolina Tax Laws Allow For Better Returns For HOAs

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

Fortunately, new North Carolina tax laws address some of these questions and offer opportunities for HOAs to obtain 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 any other corporations would. If the HOA has applied to be a non-profit entity, it can be exempt. Still, the process is complicated and should be examined by a qualified real estate tax professional.

Next, under North Carolina law, if an HOA is made up of only residential properties, it is exempt from state franchise and income tax. However, if an HOA includes any commercial properties, they are not exempt. The change in law has encouraged some HOAs to amend past tax returns to include franchise and income taxes.

Those HOAs made up solely of residential properties have their income exempt when derived from member assessments, preservation, maintenance, management fees, association dues, fines and fees, and interests on late payments.

When filing tax returns, North Carolina HOAs have two options. The first is to file using Form 1120, the traditional corporate method for most HOAs. This form can be flexible regarding expense allocations, but it insists that HOAs maintain the 90% rule. It also enjoys a lower tax rate of 15% for the first $50,000 of taxable income. The main drawback is that Form 1120 can be complicated to fill out, and the HOA may require professional assistance.

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

Third, 90% of an HOA's expenses much be for operations and maintenance, and 60% of the HOA's revenue must come from members themselves instead of 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, facility rental, and payment for easements. Some expenses incurred to generate taxable income can also be deducted. And HOAs have an option to carry forward their excess income to offset future costs.

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

Should an HOA fails to file returns, it will have to deal with penalties, interests, and preparation fees for those unfiled returns. They may also find their corporate charter at risk of suspension until they file all required returns.

If an HOA or other community association has any questions regarding 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 business headquartered in Charlotte, NC. They proudly offer rental property management, community association management, home buying and selling, maintenance, and property rehabilitation. Their experienced team aims to minimize the stress of running a homeowners association by working with the board of directors in managing the community, collecting assessments, and handling maintenance requests. In 2020, Henderson Properties renamed their community management division Henderson Association Management to better reflect the community association management services.

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