Re: HOA Accounting/Taxation
From: Christine Johnson (manzjohnsonnetzero.net)
Date: Sat, 6 Jan 2007 14:03:10 -0800 (PST)
 "Zeke Holland"  wrote:

1. Tax reporting via Form 1120 or 1120-H...

You are correct that the reporting requirements for filing the 1120 are greater than the 1120H; the only way to know which is preferable (1120 or 1120H) is to complete both and compare. Your interest and "other" income must be pretty significant offset the accounting fees for filing (assuming that you choose to employ an accountant). Your risk of audit whether you file 1120 or 1120H is no different. Supposedly, it is not the form filed (assuming it is an appropriate choice) but the figures reported on the forms that trigger audits. Of course, this could just be IRS propaganda :-).

See Section 277 of the Internal Revenue Code on in which the IRS qualifications for Community Associations are laid out.

2...... Thus, I believe they do not qualify as "reserves" in the eyes of the IRS. 1120 rules I believe any contributions made to these funds would be considered taxable income. .....

Don't know the answer to this one.

3. We do not maintain separate bank accounts for reserve funds versus operating funds....

According to Generally Accepted Accounting Principals (GAAP) for HOA/COAs, reserves and operating accounts are to be held and accounted for separately; it makes no difference whether you file 1120 or 1120H.

4. We ask for a $15/night donation for use of our guest room ........ Unless we can directly tie this income to an expense of
operating the guest room, it must be treated as taxable income, yes?

Yes.

5. Similarly, we have a small monthly Associate Fee that we charge neighbors who are not HOA members to become "Associates..............Since this income is not coming from property owners, I believe it must also be treated as taxable income, yes?

Yes.

Unsolicited advice which may have nothing at all to do with the circumstances of you and your community:

If I were a member of your community, I would proposed that we contract with a Community Association Management firm, a bookkeeper, or an accounting service that specializes in HOA/COA accounting. It is unreasonable for you alone to assume the burden of tax filing in addition to the bookkeeping. While the IRS (supposedly) very rarely goes after HOAs, if your community should face litigation you could find yourself (or your successor could find themselves) employed without pay in a very time consuming financial audit; the worst would be the unpleasant circumstance of having the defend your reasoning on on entries made on your tax forms.

At Stone Curves, we chose early on to contract for the bookkeeping with an Community Association Management firm and our taxes are completed by an accountant. Even with professional services, there is still a significant amount of work for the treasurer to do that is not within the scope of their contract for service.

I cannot imagine spending hours at my desk doing A/P, A/R, calling my neighbors on collection issues, preparing end-of-month financial reports, end-of-year financial reports, not to mention being accountable to all my neighbors for the breadth of knowledge that it takes to stay on top of the financial affairs of the Association.

Christine Johnson, the happily outgoing Treasurer of
Stone Curves Cohousing

--Zeke Holland
Two Echo Cohousing
Brunswick, Maine


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