Each of us is undoubtedly thinking about our own personal tax returns with April 15th upon us. However, board members have to think about tax time twice: personally and on behalf of the association.
Hopefully, every association has retained an accounting professional to guide them throughout the year and, in particular, when it comes to preparing the association's tax return. I reached out to Monte Kane of Kane & Company CPAs (industry experts in Florida) to give some insight into this process.
According to Monte, condominiums and HOAs file either standard Federal corporate returns, using Form 1120, or if they qualify for the "primarily residential" test, they can file the Federal Form 1120H. When an association files an 1120H return, it does not file a Florida income tax return. However, there are pros and cons to filing the 1120H which you should discuss with your CPA. Co-ops generally can only file an 1120C.
While we all dread April 15th, an association's return is due on the 15th day of the third month after the year end. A calendar year association's federal return would thus be due on March 15th with an ability to extend filing by 6 months.
Any officer of the association can sign the association's tax return but he or she must understand what is being signed which is the same requirement when a personal tax return is being signed. A community association manager should not sign the association's tax return unless he or she is an officer of the association.
While a shared ownership community association is a not-for-profit corporation that does not confer tax exempt status. Associations are taxed and they can be fined/penalized for not paying taxes timely and/or for not filing their returns timely.
Associations occasionally do receive a tax refund, usually when an association is required to make estimated payments and those amounts exceed the actual taxes owed. A refund may also be due and owing where an amended return is filed due to the fact that a prior accounting professional was not aware of certain specific elections that a board could make and/or was unaware of certain IRS Revenue Rulings. The accounting professional you choose to guide your board counts.
Some areas that require expert assistance include:
- Income resulting from settlements of construction defect and other lawsuits
- Reserves for contingencies can pose tax issues
- Understanding what is subject to State Sales and Use Tax
- Be familiar with Revenue Ruling 70-604 and have your members take an annual vote to approve it (this can save the association taxes on excess income)
Lastly, Monte reminds us that associations can avoid or reduce taxes with proper planning. He cautions, "We have seen too many associations where rules are not followed and the Board is exposing themselves in the event of an audit. Remember, boards are fiduciaries."