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WHAT MAKES TAXATION OF COMMUNITY ASSOCIATIONS SO COMPLEX?

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

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WHAT MAKES TAXATION OF COMMUNITY ASSOCIATIONS SO COMPLEX?

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  1. WHAT MAKES TAXATION OF COMMUNITY ASSOCIATIONS SO COMPLEX? DeLeon & Stang, CPAs and Advisors Allen P. DeLeon, CPA allen@deleonandstang.com LUNCH-N-LEARN

  2. 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

  3. 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

  4. OVERVIEW Three basic options • 1120-H • 1120 • 990 – exempt

  5. 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..

  6. 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.

  7. 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

  8. FORM 1120 (CONTINUED) • Also taxed on investment income and non-exempt income • Potentially taxed on net membership income

  9. 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.

  10. 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

  11. 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

  12. 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.

  13. ADVICE TO BOARDS (CONTINUED) • Make annual 70-604 election as required by IRS if applicable

  14. QUESTIONS

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