The filing category selected by an organization determines the IRS rules applied to the homeowners’ association's tax filing. When a condo association files Form 1120, it is filing as a corporation, that is, as a nonexempt membership organization, not as a homeowners’ association.
Filing Form 1120 subjects the homeowners’ association to tax risk that it does not have when filing Form 1120-H because those tax rules are designed especially for homeowners’ associations.
When a homeowners’ association files its taxes using Form 1120-H, a different set of rules applies. Those rules are explained “Revenue Ruling 70-604” and the association must strictly follow them to avoid task risk for their association.
In the following scenario, each year an association adopts a budget prepared by the property manager based on the prior year’s budget (not on prior year’s operating expenses and recommended reserve requirements based on the association's reserve study). The proposed budget exceeds the association’s operating expenses and reserve requirements by a significant amount. The majority of the board approves the budget as drafted by the property manager.
At the YE 2011, the board president and secretary approve transferring a $30,000 overage from operating fund to the reserve fund.
At the time of the transfer, the reserve fund is already fully funded per the schedule of annual reserve contributions. In fact, at the end of FY 2011, the reserve fund exceeded the recommended reserve requirement by $10,000. The following year's budget continues to assess homeowners the recommended reserve amount. There is no reduction in homeowner assessments in that year in consideration of the $30,000 transfer.
For FY 2011, the association's accountant prepared the association's tax return to file the 1120-H form.
A board member contends that the association is over-assessing its members, and that this practice does not conform to the Revenue Ruling 70-604 requirements for the following reasons.
· No 70-604 election was made by the stockholder-owners/association members of the corporation at the annual meeting.
· There was no vote of the board as to whether or not to transfer the overage from the operating funds to the reserve account.
· The association president and secretary signed the election form without a vote by the membership or the board of directors.
· The board gave no advance notice to the stockholder-owners/association members of the capital nature of their assessment before it would qualify as a contribution to capital under IRC Section 118.
· Per INFO 2004-0231 "Section 1.528-9(a) provides...excess assessments during a taxable year which are either rebated to the members or applied to their future assessments are not considered gross income and therefore will not be considered exempt function income for such taxable year.”
· The succeeding year’s budget was not reduced by the amount of the preceding year’s overage.
Questions:
What steps should the board take now, before the tax filing deadline of April 17th, to correct the situation?
What actions should the association board take to avoid similar situations in the future?
The filing category selected by an organization determines the IRS rules applied to the homeowners’ association's tax filing. When a condo association files Form 1120, it is filing as a corporation, that is, as a nonexempt membership organization, not as a homeowners’ association.
ReplyDeleteFiling Form 1120 subjects the homeowners’ association to tax risk that it does not have when filing Form 1120-H because those tax rules are designed especially for homeowners’ associations.
When a homeowners’ association files its taxes using Form 1120-H, a different set of rules applies. Those rules are explained “Revenue Ruling 70-604” and the association must strictly follow them to avoid task risk for their association.
Revenue Ruling 70-604 – The Complete Guide
Revenue Ruling 70-604: The Latest Word
In the following scenario, each year an association adopts a budget prepared by the property manager based on the prior year’s budget (not on prior year’s operating expenses and recommended reserve requirements based on the association's reserve study). The proposed budget exceeds the association’s operating expenses and reserve requirements by a significant amount. The majority of the board approves the budget as drafted by the property manager.
At the YE 2011, the board president and secretary approve transferring a $30,000 overage from operating fund to the reserve fund.
At the time of the transfer, the reserve fund is already fully funded per the schedule of annual reserve contributions. In fact, at the end of FY 2011, the reserve fund exceeded the recommended reserve requirement by $10,000. The following year's budget continues to assess homeowners the recommended reserve amount. There is no reduction in homeowner assessments in that year in consideration of the $30,000 transfer.
For FY 2011, the association's accountant prepared the association's tax return to file the 1120-H form.
A board member contends that the association is over-assessing its members, and that this practice does not conform to the Revenue Ruling 70-604 requirements for the following reasons.
· No 70-604 election was made by the stockholder-owners/association members of the corporation at the annual meeting.
· There was no vote of the board as to whether or not to transfer the overage from the operating funds to the reserve account.
· The association president and secretary signed the election form without a vote by the membership or the board of directors.
· The board gave no advance notice to the stockholder-owners/association members of the capital nature of their assessment before it would qualify as a contribution to capital under IRC Section 118.
· Per INFO 2004-0231 "Section 1.528-9(a) provides...excess assessments during a taxable year which are either rebated to the members or applied to their future assessments are not considered gross income and therefore will not be considered exempt function income for such taxable year.”
· The succeeding year’s budget was not reduced by the amount of the preceding year’s overage.
Questions:
What steps should the board take now, before the tax filing deadline of April 17th, to correct the situation?
What actions should the association board take to avoid similar situations in the future?
Hi. You can find a blank fillable 2012 form 1120 here.
ReplyDeletehttp://goo.gl/ixMsnj
Please feel free to use it. You can fill out the form, save it, fax it, and email it