1) What is the main difference in tax form 1120 vs 1120-H?
- Form 1120-H is the annual federal tax filing form which most associations file and has a 30% tax rate on applicable reported income. Taxable income includes interest income, user fees, and other non-exempt income. The association needs to maintain a conservative ratio of income/association expenses to continue utilizing the 1120-H form.
- Form 1120 is necessary when the associations income significantly exceeds its necessary expenses and no longer qualifies to file a simplified 1120-H form. The HOA's income is taxable like a regular corporation. Income allocated to reserve fund may be exempt from tax if certain requirements are met.
- The choice to file an 1120 or 1120-H is made annually.
2) Who can sign the tax return?
- The tax filing should be signed by a current officer of the board.
3) When are tax returns due for calendar year associations? (FYE December 31st)
- Federal Forms 1120 and 1120-H are due April 15th and a 6 month extension can be filed modifying the due date to October 15th.
- Federal Forms 990, 990EZ are due May 15th and a 6 month extension can be filed modifying the due date to November 15th.
- State Franchise tax forms are due May 15th for all calendar fiscal year ends and an 6 month extension is also available to modify the due date to November 15th.
- Aim to provide the full year of Financial statements to your accountant before the end of February, 20XX to ensure the tax filing is completed on time.
4) During an audit, am I guaranteeing the audit information by signing the representation letter?
- The audit representation letter is not a guarantee of any sort. It very clearly states to the best of your knowledge the information provided for the audit is complete. If the representation letter is not signed, we have no choice but to disclaim the opinion when issuing a final audit report.
5) Do we have to pay the audit invoice prior to the issuance of the final audit report?
- Yes, otherwise our independence would be impaired.
6) Since our HOA is organized as a non-profit corporation, are we automatically tax exempt?
- No, you have to file an application with the IRS for federal tax exempt status and meet certain requirements. Associations like condos that provide exterior maintenance are not eligible.
7) What are the benefits of federal tax exemption?
- Once you have been approved for federal tax exemption, the most significant benefit is interest income earned by the association is tax exempt. It allows allows the association to pursue state sales and franchise tax exemptions. Many associations are incorrectly classified as taxable entities and it costs them thousands of dollars of sales tax paid to each community vendor which results in higher assessments for home owners. Ask us if your association qualifies for tax exemption. We can often also recover any sales tax paid between the tax exemption application and issuance date.
8) If we restrict the usage of the community pool, does that mean we cannot be federally tax exempt?
- Not necessarily, the entire activities of the Association must be considered and IRC Section 501(c)(4) deals with “Social Welfare” organizations that serve a public benefit.
9) Should our association have an audit every year?
- Absolutely and some associations are required by state law to have an audit performed annually. Also refer to your associations declarations and bylaws to determine the required frequency of financial statement audits.
10) Should our association have a reserve study?
- If you have common property that requires replacement or major repairs, then yes. The study should be updated every 5 years at a minimum. You cannot prepare a proper budget without updated information from a reserve study.
