At Bainbridge, Little & Co, CPAs, we specialize in Community Association tax returns. These Community Associations have the option of filing form 1120 or 1120-H each year. Most Community Associations qualify for form 1120-H and must pass the following tests:
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More than 60% of income must come from membership revenues, i.e. assessments, fines and late fees
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More than 90% of expenses must be for Community Association maintenance
The following are summaries of the two tax returns for Community Associations with a list of some of their advantages and disadvantages:
Filing for 1120-H
Advantages
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All revenue from member assessments, late fees and fines are exempt from tax
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Generally only pay tax on investment income (typically just interest income)
Disadvantages
Filing form 1120
Advantages
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Tax rate is lower on the first $75,000 of income (uses C Corp brackets)
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15% on first $50,000 of income
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25% on next $25,000 of income
Disadvantages
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All income from member assessments, late fees and fines are taxable
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Community Associations must prepare a resolution to potentially carry over excess membership income to the next fiscal year.
In order to file form 1120 certain requirements must be met, such as:
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Segregation of operating and reserve cash.
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Segregation of operating and reserve activity (i.e. deposits and expenditures).
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Revenue Ruling 70-604 election by membership, not the board of directors (if needed).
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Cannot use Revenue Ruling 70-604 two years in a row.
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Budget should agree with recommended monthly allocations contained in the reserve study.
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Actual reserve transfers should agree with the budget.
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Reserves (replacement fund) should be segregated by capital and non-capital items.
If you have any questions regarding your association’s tax form, please call Mark S. Little II, CPA at (702) 243-2695 extension 2.
