WHAT MAKES TAXATION OF COMMUNITY ASSOCIATIONS

SO COMPLEX?

DeLeon & Stang, CPAs and Advisors

Allen P. DeLeon, CPA

allen@deleonandstang.com

LUNCH-N-LEARN

Speaker biography – Allen P. DeLeon, CPA

Partner with DeLeon & Stang, CPAs and Advisors

Over 25 years community association auditing experience

Member of the Community Association Institute (CAI)

Chair of the Maryland Association of CPAs

Agenda

Introduction Overview of community association

taxation Different tax forms that can be filed IRS revenue rulings that are important to

know about What to advise your client boards

OVERVIEW

Three basic options

1.1120-H

2.1120

3.990 – exempt

FORM 1120-H

According to IRS, about 70% of community associations file federal tax returns using this form

Flat tax rate of 30% Applies to investment income and non-

exempt income Non-exempt income – cell tower rental,

non member pool fees etc..

1120-H (continued)

Deductible expenses allocable toward taxable income are allowed as deductions. Portion of tax preparation fee Allocated expenses related to non exempt income

IRS code 528, created specifically for homeowner associations

Safest filing method, since it assures that no other income can be subject to tax.

FORM 1120

Applies to community associations not electing 1120-H

Regular corporation tax rates: 15% $50,000 25% next $25,000 34% next $25,000 39% next $25,000

FORM 1120 (CONTINUED)

Also taxed on investment income and non-exempt income

Potentially taxed on net membership income

FORM 990

A few associations which are tax exempt under IRS code section 501(c) (4) are eligible to file form 990

Form is normally used by charities and trade associations

All income is tax exempt, except unrelated business income.

IRS REVENUE RULING 70-604

1970 ruling Response to homeowner association

filings of 1120’s Allows HOA’s to avoid taxation on excess

membership income by either: Refunding to members Carrying over to next year

IRS REVENUE RULING 70-604 (CONTINUED)

Every HOA filing an 1120 should make this election each year.

Election is made by board resolution to apply excess membership income to next year’s assessments.

Can NOT be made by transferring to replacement reserve fund.

Election must be made before tax return is filed at annual meeting.

Not intended to be a indefinite carryover, but rather a yearly deferral

ADVICE TO BOARDS

HOA’s with large due to/from replacement reserve fund are recommended to file 1120-H form, to reduce risk of taxation of membership income.

HOA’s with less than $50,000 in investment income and a profit for the year should file 1120, to result in less tax.

HOA’s with deficit in the operating fund equity should consider a one time transfer from reserve fund to operating fund to reduce deficit, but should then increase assessments to replenish replacement reserve fund.

ADVICE TO BOARDS (CONTINUED)

Make annual 70-604 election as required by IRS if applicable

QUESTIONS