True CAs are the only taxable entity that can choose each year which tax form to file, and each of these tax forms has an entirely different tax rate. Absolutely true! It is a bizarre tax law, and one that many do not fully understand. Here is the quick & simple explanation: Form 1120-H Tax rate 30% – One page, easy tax return Uses the terms Exempt Function and Taxable Income Not necessary to have operating and reserve fund separate Not necessary to have Revenue Ruling 70-604 Estimated tax payments not required Little audit risk Only available for residential associations (or substantially residential) 85% of the units or lots must be residential CAs with large amounts of per use services (e.g. valet and maid) may not qualify 60% of income must be exempt function 90% of expenses must be exempt function (includes reserve expenses) Form 1120 (or 1120-A) Tax rate first $50,000 of income 15% – – More complicated return to prepare (multiple pages) Estimated tax payments required Have to detail all income and expenses of the Association Segregates income into Membership and Nonmembership Renters are considered members for tax law. Nonmembership, includes investment earnings, e.g.interest Capital Contributions are not taxable, if the following occurs: Earmarked for a capital purpose (e.g. backed by a reserve study) Segregated and held for a capital purpose (e.g. separate bank account, segregated on the financial statements, accounting for funds separately from operating funds) purpose does not include painting, contingency and “Capital” maintenance type of items (see article at the end) You can include in the reserve study and replacement fund, but the tax preparer must be able to break out the allocations and expenditures. Advance notification to members (e.g. budget or reserve study) Money expended for capital purposes Allows excess membership income to be carried over to the next year (Revenue Ruling 70-604 discussed later) –
True CAs are the only taxable entity that can choose each year which tax form to file, and each of these tax forms has an entirely different tax rate. Absolutely true! It is a bizarre tax law, and one that many do not fully understand. Here is the quick & simple explanation: Form 1120-H Tax rate – 30% One page, easy tax return Uses the terms Exempt Function and Taxable Income Not necessary to have operating and reserve fund separate Not necessary to have Revenue Ruling 70-604 Estimated tax payments not required Little audit risk Only available for residential associations (or substantially residential) 85% of the units or lots must be residential CAs with large amounts of per use services (e.g. valet and maid) may not qualify 60% of income must be exempt function 90% of expenses must be exempt function (includes reserve expenses) Form 1120 (or 1120-A) Tax rate – first $50,000 of income – 15% More complicated return to prepare (multiple pages) Estimated tax payments required Have to detail all income and expenses of the Association Segregates income into Membership and Nonmembership Renters are considered members for tax law. Nonmembership, includes investment earnings, e.g.interest Capital Contributions are not taxable, if the following occurs: Earmarked for a capital purpose (e.g. backed by a reserve study) Segregated and held for a capital purpose (e.g. separate bank account, segregated on the financial statements, accounting for funds separately from operating funds) “Capital” purpose does not include painting, contingency and maintenance type of items (see article at the end) You can include in the reserve study and replacement fund, but the tax preparer must be able to break out the allocations and expenditures. Advance notification to members (e.g. budget or reserve study) Money expended for capital purposes Allows excess membership income to be carried over to the next year (Revenue Ruling 70-604 – discussed later)