1. WHAT MAKES TAXATION OF COMMUNITY ASSOCIATIONS SO COMPLEX? DeLeon & Stang, CPAs and Advisors Allen P. DeLeon, CPA allen@deleonandstang.com LUNCH-N-LEARN

2. Speaker biography – Allen P. DeLeon, CPA  Partner with DeLeon & Stang, CPAs and Advisors  Over 25 years community association auditing experience  Member of the Community Association Institute (CAI)  Chair of the Maryland Association of CPAs

3. Agenda  Introduction  Overview of community association taxation  Different tax forms that can be filed  IRS revenue rulings that are important to know about  What to advise your client boards

4. OVERVIEW Three basic options 1. 1120-H 2. 1120 3. 990 – exempt

5. FORM 1120-H  According to IRS, about 70% of community associations file federal tax returns using this form  Flat tax rate of 30%  Applies to investment income and non- exempt income  Non-exempt income – cell tower rental, non member pool fees etc..

6. 1120-H (continued)  Deductible expenses allocable toward taxable income are allowed as deductions.  Portion of tax preparation fee  Allocated expenses related to non exempt income  IRS code 528, created specifically for homeowner associations  Safest filing method, since it assures that no other income can be subject to tax.

7. FORM 1120  Applies to community associations not electing 1120-H  Regular corporation tax rates:  15% $50,000  25% next $25,000  34% next $25,000  39% next $25,000

8. FORM 1120 (CONTINUED)  Also taxed on investment income and non-exempt income  Potentially taxed on net membership income

9. FORM 990  A few associations which are tax exempt under IRS code section 501(c) (4) are eligible to file form 990  Form is normally used by charities and trade associations  All income is tax exempt, except unrelated business income.

10. IRS REVENUE RULING 70-604  1970 ruling  Response to homeowner association filings of 1120’s  Allows HOA’s to avoid taxation on excess membership income by either:  Refunding to members  Carrying over to next year

11. IRS REVENUE RULING 70-604 (CONTINUED)  Every HOA filing an 1120 should make this election each year.  Election is made by board resolution to apply excess membership income to next year’s assessments.  Can NOT be made by transferring to replacement reserve fund.  Election must be made before tax return is filed at annual meeting.  Not intended to be a indefinite carryover, but rather a yearly deferral

12. ADVICE TO BOARDS  HOA’s with large due to/from replacement reserve fund are recommended to file 1120-H form, to reduce risk of taxation of membership income.  HOA’s with less than $50,000 in investment income and a profit for the year should file 1120, to result in less tax.  HOA’s with deficit in the operating fund equity should consider a one time transfer from reserve fund to operating fund to reduce deficit, but should then increase assessments to replenish replacement reserve fund.

13. ADVICE TO BOARDS (CONTINUED) Make annual 70-604 election as required by IRS if applicable

14. QUESTIONS