The annual operating cycle of an HOA

Budget season: draft, distribute, ratify

Every year starts the same way. The board puts together next year's operating budget, the money for landscaping, insurance, management fees, and the reserve contribution for future big repairs. That draft goes to the assessment-paying owners, either as the full document or a summary, depending on what the declaration and state law require.

In states that have adopted a common-interest ownership act, owners often get one more step: a chance to vote the budget down. Nevada's version of that rule spells out what happens next.

"If the proposed budget is rejected, the periodic budget last ratified by the units' owners must be continued until such time as the units' owners ratify a subsequent budget proposed by the executive board."

Source: Nevada Revised Statutes Chapter 116, Common-Interest Ownership (Uniform Act), Nevada Legislature

That is the point of the rule: an association is never left without a budget while owners and the board work out a number everyone can live with. Whether your state gives owners a vote at all, and what the fallback is if they use it, depends on your state's statute and your declaration.

Reserve study: this year's number depends on next decade's roof

The reserve contribution in that budget is not a guess. It comes out of a reserve study, a report estimating when major common-area components (roofs, paving, pool equipment) will need replacing and what that will cost.

Reserve studies are their own professional specialty. The Reserve Specialist (RS) credential is separate from the manager or attorney your board already works with, held by people who have completed a substantial number of studies and follow a specific set of industry standards and a code of ethics.

A reserve study produces a percent funded figure: how the association's actual savings compare to a theoretical fully funded balance. There is no single number that counts as safe for every association; weigh the figure against your state's own reserve disclosure rules and your reserve specialist's guidance rather than a rule of thumb.

Tax season: filing Form 1120-H is a choice, not a default

Somewhere in that same year, the association also owes the IRS a decision: file the standard corporate return, or elect Form 1120-H, a simplified return built for qualifying homeowners associations.

Being a nonprofit corporation under state law does not make the federal tax question go away. The default federal treatment for an association is as an ordinary taxable corporation. The 1120-H election narrows what gets taxed to non-exempt-function income (membership dues and assessments from owners acting as owners); it does not erase the filing requirement and it does not make the association tax-exempt.

"At least 60% of the association's gross income for the tax year must consist of exempt function income." "At least 90% of the association's expenses for the tax year must consist of expenses to acquire, build, manage, maintain, and care for its property."

Source: Instructions for Form 1120-H, U.S. Income Tax Return for Homeowners Associations, Internal Revenue Service

The election is made fresh every year. A board that qualified last year still has to check the income and expense tests again before filing the same way this time.