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Residential Real Estate
Jan 24, 2022

Questions About Filing Your Association's Federal Income Taxes? We've Got Answers

Sponsored Content provided by Mike Stonestreet - Founder, CAMS (Community Association Management Services)

It's everyone's favorite time of year again! No, winter is no picnic for those who aren't fans of cold weather. But the beginning of the year comes with more than just frigid temperatures and a lack of daylight. It also heralds in the menace known as tax season.

Let's face it – filing taxes is a daunting, confusing – yet necessary – task. Thankfully, we all have to do it, so there are a ton of resources available to help you figure out how to file your association's taxes. For the sake of this article, we'll be discussing federal taxes. State and property tax requirements for associations vary from state to state, so the best way to get specific information on those topics is consulting your Certified Public Accountant (CPA). Here, we'll go over some of the most frequently asked questions associations have regarding filing their federal returns.

Does My Community Association Have to File Taxes?
In most cases, yes, community associations, just like any other non-profit corporation, are required to file a corporate tax return each year on income other than that from member assessments - interest, fees charged to non-members, etc.

When is the Deadline for Filing?
Ok, fine, we have to file, but what is the deadline? Well, that depends on the end of your association's fiscal year. For personal income taxes, the April 15th deadline is ingrained in our minds (as Benjamin Franklin is alleged to have said, "In this world, nothing can be said to be certain except…"), but for associations, it may vary.

The deadline for filing income tax for most property owner associations is 45 days following the end of their fiscal year. That's April 15th for associations with a fiscal year of January 1st – December 31st. The important thing here is that if your original deadline doesn't provide you with enough time to prepare and file, there is no need to worry – you can always file an extension which will give you an extra six months to file. If you need to file an extension, your CPA can take care of this on your behalf.

What Form(s) Should Associations Use When Filing?
Now that we've (hopefully) convinced you that you have to file, you probably need to know which of the six thousand IRS forms to use. The majority of associations can choose between IRS Form 1120 or IRS Form 1120-H. So, what's the difference between the two? Does each have its advantages and disadvantages? Well, that is highly dependent on your association's finances.

Form 1120:
Form 1120 is considered the "long form" of the two options and requires associations to provide a great deal of important, detailed information. That sounds tedious, right? So why would you choose this option? Associations using form 1120 pay a lower rate (15%) on the first $50,000 of net income. However, the disadvantage of using this form is that all of your association's net income becomes taxable, even funds that haven't been used at the end of the fiscal year. Additionally, your CPA will likely charge more to prepare this form.

Form 1120-H:
The other option you have when filing your association's taxes is form 1120-H, or what is considered the "short form". The advantage of using this form is that you can exclude things like membership assessments from your association's gross income. However, according to the IRS, some requirements must be met to use Form 1120-H:

  • At least 60% of the association's gross income for the fiscal year must come from membership fees, dues, or assessments
  • At least 90% of the association's expenses for the fiscal year must consist of expenses to acquire, build, manage, maintain, or care for its property
  • No private shareholder or individual can profit from the association's net earnings except by acquiring, building, managing, maintaining, or caring for association property or by a rebate of excess membership dues, fees, or assessments.
Depending on your association's financial situation and how your non-profit is set up, there may be more advantages to filing form 1120-H – consult your CPA to find out which option is best for you.

If you would like to read more, the IRS provides some guidance about filing requirements and deadlines for forms 1120 and 1120-H on their website.

How Do I Choose the Best CPA to Prepare the Association's Taxes?
You likely already have an experienced, reputable CPA who handles your association's financial matters, but if you don't, here are a few things to consider before deciding.
  • Make sure they have experience preparing taxes for community associations. Many CPAs specialize in preparing taxes for associations. But, if you're not sure, ask questions about their experience in handling tax prep for HOAs. Preparing returns for associations can get quite complicated, and you need to be sure you have someone who knows what they're doing on your side.
     
  • Will they have the capacity to prepare your return promptly? CPAs are insanely busy during the first several months of the year, and you want to be sure that they'll have the time to have your return ready to file by the deadline.
     
  • How much do their services cost? Cost should not be high on your priority list – you want your taxes prepared correctly, so you should be willing to pay for the best service possible. But the preparation of the long form vs. short form usually has a significant cost difference, so you need to know that information.
Suppose you're not sure where to begin your search for a CPA experienced in preparing association taxes. First, reach out to your attorney or community manager - they'll be able to point you in the right direction.
 
Year-End Reports
In addition to preparing income tax returns for an association, a CPA can also be engaged to prepare year-end financial reports. A compilation is a summary of the reports as the management company or association provides them without a CPA opinion on the association's financial status. A review is more thorough than a compilation; however, not as thorough as an audit. The financial records and processes are studied during an audit, and the CPA offers a detailed opinion on them. In addition, individual invoices and deposits are verified during an audit. Audits typically come with a significantly higher preparation fee than reviews or compilations due to the level of detail they require. Therefore, it is important to consult the governing documents of your association and state statutes to determine if an annual audit is required for your association.

Preparing and filing your association's taxes is one of the more complicated tasks you'll encounter as a board member. Thankfully, you have access to a plethora of resources to guide you through the difficulties of tax preparation. And don't forget seeking professional guidance is part of your fiduciary duty to the association. By consulting experts like your CPA, attorney, and community manager, getting through tax season can be less stressful and help ensure you're making the best financial decisions for your community.
Is your community getting the Trusted Guidance it deserves? Reach out to CAMS at 888-798-2624 or through our website to learn more about the wonderful services we offer to our clients.
Mike Stonestreet, CMCA, PCAM, AMS, is Founder/Co-Owner of CAMS (Community Association Management Services). CAMS began in 1991 with Stonestreet and a few employees in a small office in Wilmington but has since grown to over 300 employees serving eight regions across North and South Carolina.
 
His current role at CAMS focuses on mergers and acquisitions, culture alignment and high-level business relationships. Stonestreet is an active member of the NC Chapter of the Community Associations Institute (CAI) and has spent time on their board of directors, serving as the chapter President in 2019.

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