In 1995, the IRS issued a Tax Advice Memorandum relating to the audit of a Florida time-share association. In this Memorandum, the IRS drew parallels between time share and homeowner associations relating to filing tax form 1120. When a homeowner association files tax form 1120-H, the IRS considers it a homeowners association. When that same association files form 1120, the IRS considers it a "nonexempt membership organization" just like a time-share association.
Associations benefit from filing form 1120 because the tax rate is 15% for the first $50,000 of taxable income compared to a flat rate of 30% for form 1120H. Associations may elect annually to file either form 1120H or form 1120. Generally, if taxable income is $1,500 or more, associations should consider filing form 1120.
There are certain form 1120 filing requirements associations should follow:
1. Maintain three separate categories of bank accounts:
- Operating (ongoing expenses)
- Capital Reserves (repair and replacement of roofs, paving, etc.)
- Non-Capital Reserves (painting and contingency reserves)
2. Provide a reserve study that supports the specific capital use of the reserves.
3. Prepare a budget that agrees with the reserve study.
4. Separately account for operating and reserve transactions in the association's financial statements and general ledger.
5. Have the members annually approve the association's filing of either tax form 1120 or 1120H. (The Board may not approve on behalf of the membership.)
6. No borrowing between the operating and capital reserve accounts.
7. If operating and reserve assessments are collected together, deposit them first into the operating account. The reserve portion should be transferred to the reserve account within two weeks.
8. Pay reserve expenses from the reserve account. If reserve expenses are paid from the operating account, that account should be reimbursed in the exact amount at least monthly.
Editor's Note: Thanks to David T. Schwindt, CPA for assistance with this article.
For more information on this subject, see www.Regenesis.net.
Published: December 1, 1999
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 Richard Thompson owns Regenesis, a management consulting company that specializes in condominium and homeowner associations. He is a nationally recognized expert on HOA management issues.Regenesis publishes The Regenesis Report, a monthly newsletter for HOA boards, developers and managers. To subscribe, go to Regenesis.net. He can be contacted by email at . |
