Academy/HOA & Community Association 101
Is an HOA a nonprofit?
Usually yes on paper, and it changes nothing about whether the HOA owes federal income tax.
Usually yes, but that's a state law label, not a tax exemption. Most associations organize as nonprofit corporations, yet the IRS still treats them as taxable corporations by default. Filing Form 1120-H lets a qualifying association be taxed only on non-membership income; it doesn't make the HOA tax-exempt.
"Nonprofit" is a state question, not a federal one
Whether your association is a nonprofit corporation is decided by state corporation law, and it is a separate legal question from whether the IRS taxes its income. California's statute, for example, defines the entity this way:
"'Association' means a nonprofit corporation or unincorporated association created for the purpose of managing a common interest development."
Source: California Civil Code Section 4080, California Legislature
Whether your own association is incorporated at all, and under which state's law, varies. Some states' associations customarily incorporate; others don't, because the state's common-interest statute already supplies the needed powers without it. Check your association's articles of incorporation, or the absence of them, rather than assuming.
Nonprofit status doesn't mean tax-exempt
A homeowners association's default federal tax treatment is as an ordinary taxable corporation, the same as any for-profit business, unless it elects otherwise. The IRS reserves a special election for an association that fits a specific description:
"organized and operated to acquire, build, manage, maintain, and care for a subdivision, development, or similar area substantially all of whose lots or buildings are homes."
Source: Instructions for Form 1120-H, Internal Revenue Service
Meeting that description lets an association file Form 1120-H instead of the standard corporate return. Filing it is an election under a specific tax code section, not a grant of the tax-exempt status that a charity holds.
The election has income and expense tests
Form 1120-H isn't automatic. To qualify, an association has to pass composition tests each year:
"At least 60% of the association's gross income for the tax year must consist of exempt function income."
Source: Instructions for Form 1120-H, Internal Revenue Service
Exempt function income means dues, fees, and assessments collected from owners in their capacity as owners, not income the association earns from non-members, such as renting out amenities to the public. Income that doesn't fit that definition can still be taxable even in a year the association otherwise qualifies for the election.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
A board member says, "We're a nonprofit corporation, so the HOA doesn't pay income tax." What's the accurate reply?
Your association files Form 1120-H this year. What has it actually done?
Half the HOA's income this year came from renting the clubhouse to the public, not from owner assessments. What does that put at risk?
Sources
- Instructions for Form 1120-H, U.S. Income Tax Return for Homeowners Associations, Internal Revenue Service
- California Civil Code Section 4080, California Legislature
Related elsewhere in the Academy
HOA & Community Association 101
Next, see how these tax filings fit into the rest of the board's year in the annual operating cycle of an HOA.
Whether your association is incorporated at all, and under which state's nonprofit law, varies. Whether specific income (interest, rentals, fees from non-members) jeopardizes the 1120-H election in a given year is a question for your association's CPA.