The first is ancillary, nonmembership income items such as those discussed previously in this article. The second is excess membership income. This return requires a more complex provision to separate income and expenses between membership and nonmembership categories.
The first is ancillary nonmembership income items such such
Membership income can be defined as gross income received from an association’s members for membership activities. It includes assessment income and other revenue items that may be charged ratably to its members, such as late fees and fines, interest from members on delinquent accounts, moving income, laundry income, storage room rental, recreation income, etc. Membership expenses are those incurred that are attributed to membership income, and generally exclude replacement/reserve fund expenditures. Membership expenses also must exclude the deductions that have been designated as nonmembership expenses.
Sometimes, an association may have a nonmembership loss, but may have net membership income for a given year. This may result in income tax, though an association may still have an alternative to income tax for that year. In some instances, net membership income may be deferred to the following year and may be applied against the next year, or the net membership income can be refunded to the association’s members, thereby deferring or reducing income tax for the year (electing under the provisions of Revenue Ruling 70-604). This may be an option for an association if some originally anticipated operating expenditures did not occur in that tax year, and were deferred to the following year, for instance. However, the association may have to meet other requirements in order to utilize this provision, so it should consult with its tax expert first.
Net membership losses (excess of membership deductions over membership income) may be carried forward and offset against net membership income in future years. This would necessitate maintaining records and documentation to support the excess membership deductions to be carried forward.
The tax rate on the 1120 corporate federal tax form starts at 15% for the first $50,000 of taxable income, and increases incrementally up to 39%. The income tax rate on this return depends on the total amount of taxable income.
There are other requirements and items that associations need to follow or comply with in filing an 1120 corporate federal tax return; too many to discuss in detail here. It is recommended that associations that file this return consult with their tax expert to ensure they are complying with all rules and regulations. It may be inferred that there is higher risk involved in filing an 1120 federal tax return, since there is more information required to be reported on that return. An 1120 tax form includes reporting prior and current year’s
48 | COMMON INTEREST®
balance sheets, and book-to-tax adjustments, in additi
balance sheets, and book-to-tax adjustments, in addition to reporting all membership and nonmembership income and expenses. As such, it may cost an association higher accounting and/or tax preparation fees to have this return prepared.
lance sheets and book-to-tax adjustments in addition ll membership and nonmembership income association higher
Choosing between the two forms
Choosing which federal income tax return to file may feel like a citizen of the Seven Kingdoms having to choose between swearing oaths to the Wolf (Stark House) or the Lion (Lannister House). Each association will have to first determine which tax return(s) it qualifies to file. If an association is unable to meet the requirements to file the 1120-H federal form, it will need to file the 1120 corporate return instead. If both forms are available options, then the association may need to calculate potential income tax under each form to see which may result in a better situation for the association. If the Association has taxable income resulting from significant interest income or income from a third-party, but does not have excess membership income in the year, it may choose to file the 1120 corporate form and utilize the lower income tax rate (provided it can comply with other 1120 considerations).
“A Lannister Always Pays His Debts”
If an association regularly owes income taxes, it may need to pay estimated income taxes on a quarterly basis each year for the current year’s taxes. In order to avoid or reduce penalties or interest, it is recommended that an association pay in amounts of approximately 110% of the prior year’s income taxes. Federal estimated tax payments can be made online via the electronic funds tax payment system (
www.eftps.gov). Illinois state estimated tax payments can still be made via a paper check accompanied by a voucher coupon, or electronically (
www.tax.illinois.gov).
Conclusion
The extent of tax code sections pertaining to common interest realty associations is quite considerable, and therefore, this article attempts to provide an explanation of the basics. To cover every facet is impossible to do in just one brief article. Paying income taxes may be construed by some to be about as pleasant as going to a Dothraki wedding ceremony. However, armed with some basic understanding and the advice of your tax expert, it doesn’t have to be “uncertain” or distressful. It can be easier than you think and less bloody than a Game of Thrones battle!
This article is for informational purposes and is not intended to be relied upon for financial or tax advice. For advice regarding your association’s particular tax situation, please contact the association’s tax expert.
A Publication of CAI-Illinois Chapter
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60