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Summary:
As Hideaway prepares its budget for 2027, I believe members should take a closer look at how our Association manages its finances, particularly when it comes to decisions that could affect how much money is available for community operations and improvements.
While reviewing Hide-A-Way Lake Club's financial records, I discovered something in its 2024 independent audit that raised questions. According to the audit, Hideaway is organized as a Texas nonprofit corporation and is recognized as a homeowners association under Internal Revenue Code §528. However, for both 2023 and 2024, the Association chose regular corporate tax treatment rather than making the special federal tax election available to qualifying homeowners associations.
The IRS allows eligible homeowners associations to choose between regular corporate taxation under Form 1120 and special homeowners association treatment under Form 1120-H. Depending on an association's income, expenses, and financial circumstances, either option could produce a lower overall tax bill.
What concerns me is that I have not found documentation explaining why Hideaway chose regular corporate taxation, whether both options were compared, or whether that decision saved the Association money. The fact that regular corporate taxation was selected does not automatically mean the decision was wrong, but it does raise questions about the financial reasoning behind it.
With another annual budget being prepared, those questions become particularly important. Members regularly hear about rising expenses, needed repairs, and community improvements. If the Association has opportunities to reduce unnecessary costs, I believe those opportunities should be carefully examined before members are asked to contribute additional money.
I am not claiming Hideaway overpaid its federal income taxes. That cannot be determined without reviewing the calculations under both tax methods. However, I believe members deserve to understand why this decision was made, whether it was financially beneficial, and whether the Association continues to evaluate its available tax options.
Before another budget is approved, shouldn't members know whether Hideaway is making every reasonable effort to manage its expenses responsibly?
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Why This Matters as Hideaway Prepares Its 2027 Budget
As Hideaway reviews its finances and prepares the budget for 2027, I believe this is an important time for members to examine how our Association manages its money. We regularly hear discussions about increasing operating expenses, necessary road repairs, drainage improvements, facility maintenance, and other projects throughout our community. Those expenses ultimately affect members through the dues, assessments, and fees we pay, which makes responsible financial planning especially important.
While reviewing Hide-A-Way Lake Club's financial records, I discovered something in the Association's 2024 independent audit that I believe deserves attention before another annual budget is finalized. According to the audit, Hideaway chose to be taxed as a regular corporation in both 2023 and 2024, despite being organized as a Texas nonprofit corporation and having the option to elect special federal tax treatment available to qualifying homeowners associations.
Choosing regular corporate taxation is not necessarily wrong, and there may be legitimate financial reasons for making that decision. However, I have not found an explanation showing why that particular tax treatment was selected, whether the alternatives were compared, or whether the decision resulted in the lowest possible tax liability for the Association.
At a time when members are being asked to consider the financial needs of our community, I believe those questions are worth answering. If there are legitimate opportunities to reduce expenses without affecting services or maintenance, shouldn't those opportunities be part of the budget discussion?
What I Discovered in Hideaway's Independent Audit
My initial interest in Hideaway's federal tax status began when I searched the IRS Tax Exempt Organization Search and could not find a clear listing for the Association. Like many members, I understood Hideaway to be a nonprofit organization, so I wanted to better understand what that designation meant and how it affected the Club's finances.
What I learned is that being organized as a nonprofit corporation under Texas law does not automatically exempt an organization from paying federal income taxes. Texas nonprofit status and federal tax-exempt status are two different classifications, and a homeowners association may be subject to federal income taxes even though it operates as a nonprofit corporation.
Hideaway's 2024 independent audit identifies the Club as a Texas nonprofit corporation and describes its recognition as a homeowners association under Internal Revenue Code §528. The audit also states that for both 2023 and 2024, Hideaway elected regular corporate tax treatment rather than making the special election available under §528.
This caught my attention because the IRS provides a specific tax election for qualifying homeowners associations. I wanted to understand why Hideaway chose the regular corporate method instead, particularly when the decision could potentially affect how much money the Association pays in federal income taxes each year.
The audit establishes which tax treatment was selected, but the information I have reviewed does not explain the financial reasoning behind that choice. Without a comparison of the available options, I cannot determine whether regular corporate taxation was the most beneficial approach for Hideaway.
Understanding the Difference Between the Two Tax Options
The IRS allows qualifying homeowners associations to elect special federal tax treatment under Internal Revenue Code §528 by filing Form 1120-H. Under this method, certain income received from property owners, including qualifying membership dues and assessments, can generally be excluded from taxable income. The Association would still be responsible for paying federal income taxes on other taxable income, subject to the applicable requirements.
Alternatively, a homeowners association may file Form 1120 and be taxed under the regular corporate income tax rules. The two methods differ in how certain income and deductions are treated, which can significantly affect the final amount of federal income tax owed.
Under Form 1120-H, taxable income is generally subject to a 30% federal tax rate, while regular corporate taxation generally uses a 21% rate. However, comparing those percentages alone does not establish which option is better because the taxable income calculated under each method may be different.
In fact, the IRS advises homeowners associations to compare their total tax liability under both Form 1120 and Form 1120-H because either method may produce a lower tax bill depending on the Association's circumstances.
IRS — Instructions for Form 1120-H
This distinction is important because I do not want members to assume that filing as a regular corporation automatically means Hideaway paid more taxes. That would not be an accurate conclusion without reviewing the financial calculations. My concern is whether the Association performed that comparison and whether the selected method provided the greatest financial benefit.
Could Hideaway Have Paid More Federal Income Tax Than Necessary?
This is the question that concerns me most, especially as we prepare another annual budget.
Hideaway collects and manages substantial revenue through membership dues, assessments, fees, and Club operations. Those funds support the facilities, infrastructure, services, and administrative responsibilities of our community. I am intentionally not publishing specific financial amounts from the audit because I am treating that information as potentially confidential, but we are discussing an organization with millions of dollars flowing through its annual operations.
When an organization manages that level of revenue, even relatively small differences in its expenses can become financially significant. Federal income taxes are a legitimate expense when owed, but I believe the Association should make reasonable efforts to avoid paying more than legally necessary.
If Hideaway's accountants compared the available tax options and determined that regular corporate taxation produced a lower overall tax bill, I would welcome that explanation. It would demonstrate that the Association considered its alternatives and selected the approach that was most financially beneficial.
However, if the comparison showed that filing under Section 528 would have saved money, I believe members would want to understand why the alternative was not selected. Any unnecessary expense represents money that could otherwise remain available for community operations, maintenance, improvements, or future financial needs.
I want to emphasize that I have not established that Hideaway overpaid its taxes or that its tax filings were incorrect. The audit alone does not provide enough information to reach that conclusion. What it does establish is that the Association chose regular corporate taxation for two consecutive years, and I believe members should understand the reasoning behind that decision.
Who Made the Decision, and Was It Financially Justified?
One of the questions I have been unable to answer from the records available to me is who recommended that Hideaway use regular corporate tax treatment and what information supported that recommendation.
Was the decision made based on advice from the Association's accountants? Did management review both filing options? Was the Board presented with a comparison of the potential tax liability under each method before the decision was made?
These questions matter because financial decisions should be based on a clear understanding of the available options and their potential consequences. I am not suggesting that members were necessarily entitled to vote on which federal tax form the Association filed, but I do believe that management and the Board should be able to explain the financial reasoning behind significant decisions affecting the Club.
There may be a perfectly reasonable explanation for why regular corporate taxation was selected. Perhaps it resulted in a lower tax bill, or perhaps the Association's financial circumstances made the regular corporate method more appropriate. If that is the case, providing members with a general explanation would help address these concerns.
What I find troubling is that I have not located documentation explaining the decision or showing whether the Association considered the financial advantages and disadvantages of each option. Given the financial responsibilities entrusted to the people managing Hideaway, I believe that information deserves attention.
What About the Taxes for 2025 and 2026?
Although the audit I reviewed identifies Hideaway's tax treatment for 2023 and 2024, I believe the question becomes even more relevant when we consider subsequent years and our upcoming 2027 budget.
The special homeowners association tax election under Section 528 is made separately for each tax year, meaning an eligible association can reevaluate its options annually. A decision that made financial sense in 2023 may not necessarily have been the most beneficial choice in 2024, 2025, or 2026.
Changes in membership revenue, operating expenses, investment income, and other financial circumstances can affect how much tax an association would owe under either filing method. That makes it important to consider the available options using the financial information applicable to each year.
I would like to know which tax treatment Hideaway selected for 2025 and what approach it expects to use for 2026. More importantly, I would like to understand whether the Association reviews both methods each year to determine which is most financially beneficial.
As we prepare our 2027 budget, it seems reasonable to include tax planning among the financial decisions being evaluated. If the Association has opportunities to reduce expenses through lawful and appropriate tax treatment, those opportunities could affect how much money needs to be collected or allocated for future operations.
The Questions I Believe Members Deserve to Have Answered
I believe Hideaway could address these concerns by providing members with a straightforward explanation of its federal tax decisions. In particular, I would like the Board or management to answer the following questions:
- Why was regular corporate taxation selected for 2023 and 2024? What financial or accounting considerations supported the decision?
- Were both tax options compared? If so, what was the difference between the projected or calculated federal tax liability under Form 1120 and Form 1120-H?
- Who recommended and authorized the decision? Was the Board informed about the available alternatives and their potential financial consequences?
- What tax treatment did Hideaway use for 2025, and what does it anticipate using for 2026?
- Will the Association compare its available tax options as part of future financial planning?
I believe these are reasonable questions for an organization funded substantially by its members. I am not asking the Association to publicly disclose confidential tax information or sensitive financial details. A meaningful explanation of how the decision was evaluated, who was responsible for it, and whether it was considered financially beneficial would be a reasonable starting point.
If the decision saved Hideaway money, I believe members would appreciate knowing that the Association took steps to manage its tax obligations efficiently. If the available options were not compared, then I believe that is something that should be addressed as part of future financial planning.
Before Another Budget Is Approved, Let's Understand the Decisions Being Made
As members, we are regularly told about the expenses required to operate and maintain Hideaway. We hear about the costs of roads, drainage, facilities, staffing, equipment, and the many other responsibilities involved in managing our community. I understand that maintaining an Association of this size requires money, and I am not suggesting those expenses can simply be eliminated.
However, I believe financial responsibility involves more than determining how much money the Association needs to collect. It also involves examining where money is being spent, identifying opportunities to reduce expenses, and making sure significant financial decisions are supported by sound reasoning.
That is why I believe Hideaway's federal tax treatment deserves attention as the 2027 budget is being prepared. If regular corporate taxation is the most financially beneficial option, then explaining that decision should help members understand how the Association manages its tax obligations. If another method would be more beneficial, I believe the Association should seriously consider that alternative for future tax years.
I am not asking anyone to assume that Hideaway made the wrong decision. I am asking that the decision be explained and supported with enough information for members to understand whether the Association acted in its financial interests.
Before members are asked to approve another budget or contribute additional money, I believe we deserve to know whether our Association is making every reasonable effort to manage expenses responsibly.
That includes examining its federal tax obligations, understanding the available options, and making informed decisions about how our money is spent.
I believe those are reasonable expectations, and I hope Hideaway's Board and management will provide the answers.
Sources and Supporting Documents
Hide-A-Way Lake Club 2024 Independent Audit — The audit identifies Hideaway as a Texas nonprofit corporation and describes its treatment as a homeowners association under Internal Revenue Code §528. It also states that the Association chose regular corporate tax treatment for both 2023 and 2024.
I am not publishing the complete audit because it contains financial information that I am treating as potentially confidential.
Internal Revenue Service — Instructions for Form 1120-H — Explains the special tax election available to qualifying homeowners associations, the differences between regular corporate taxation and Section 528 treatment, and the importance of comparing the tax liability under both methods.
IRS — Instructions for Form 1120-H
Internal Revenue Service — About Form 1120-H — Provides general information about the federal income tax return available to qualifying homeowners associations.
Internal Revenue Service — Homeowners Associations — Provides additional information about homeowners associations and federal tax requirements under Section 528.
Matt DeFeo
Matt is a husband to Chrissy, father of three, and retired law enforcement officer. Through Voices of Hideaway, he documents records, firsthand experiences, and unanswered questions while trying to inform Hideaway members and promote transparency and accountability in the community.