A Homeowners Association has the right to either file a Form 1120 or Form 1120-H provided:
This really is the question. The providing part of the question.
Title 26, chapter 1, Section 301.9100-2(a)(2)(v)
The election to be treated as a homeowners association under section 528;
Title 26, chapter1, section 301.9100-2(a)
Automatic 12-month extention–(1) In general. An automatic extension of 12 months from the due date for making a regulatory election is granted to make elections described in paragraph (a)(2) of this section provided the taxpayer takes corrective action as defined in paragraph (c) of this section within that 12-month extension period. For purposes of this paragraph (a), the due date for making a regulatory election is the extended due date of the return if the due date of the return including extensions and the taxpayer has obtained an extension of time to file the return. This extension is available regarless of whether the taxpayer timely filed its return for the year the election should have been made.
If you are late in filing your return past the natural 3 1/2 months timeframe or an additional 6 months for an extension plus 12 months for the automatic extension you will be required to file a Form 1120 and may not elect to file a Form 1120-H. The task of being a procrastinator in this case can be extremely costly and expensive. Not only are penalties and interest adding from the usually higher Form 1120 calculations but in some cases the difference of the 1120-H and the 1120 can be substantial.
When filing Form 1120 the usage of normal depreciation schedules and calculations must be used. If an asset needs to be depreciated and a section 179 election is not permitted due to the usage of the asset then the differences of the taxable amount can be enormous. If you have an asset such as a Roof which costs $75,000 and in order to get enough in the way of cash for paying off the new asset of $50,000 then on your 1120 you would have an income of $50,000 and a depreciation for the year if put into service on February 28th of $2386.36. On the Form 1120-H you would have income of $75,000 and expenses of $50,000. Additional expenses for qualification would usually mean for direct income is not taxed. Only your indirect expenses of interest income from dues and fees for the year would be taxable. This assumes you are not renting the grounds out to outsiders and looking at other extra income which may be separately taxed. And of course, it would be difficult to have additional expenses to make up the $47,613.64 difference for Form 1120.
But is there a solution to the above situation besides just having to pay taxes on the “excessive” income for the current year if you missed the 528 election time allowance.
My cautionary notes would be to have interest income from bank accounts in a tax-exempt money market instead of just in a regular bank account. Your financial plan or board of directors and members would have to direct you to this path. Some tax may be healthy for your need for a return on investment or for the basic concept of reaching your building maintenance fund program. This would be a board and members decision. The treasurer should not make this as an independent decision.
The second item to look at when establishing a policy of improving the life expectancy of your building (new roof, double and triple pane windows, etc.) is to collect the income over a period of years. Since you can have an income and expense which do not match (positive income) up to a certain level adjust your building fund to exceed your expenses. Look at the required income and expense ratios of 90/60%. (See Form 1120-H instruction booklet on page 2 for examples and definitions.) Do not go under these numbers however. You will need to satisfy these ratios or you will not be qualified to file as an 1120-H Homeowners Aassociation.
Do not confuse an asset which increases the life expectancy of your building and one which you will need to expense for the year. If it is maintenance or a repair and not extensive and does not increase the life expectancy of your building then it could be a current expense and not a depreciable asset. For most purposes also a section 179 deduction on residential property does not apply. But if the assets is a coffee pot for example which would be personal property and not real property then a section 179 may apply. But this is another topic for another day.
So bottom lining for tax purposes on Form 1120-H. If you can elect then you usually will be better off making an election. If you cannot elect or perceive that you may not be able to elect Form 1120-H then try to reduce your exposure to excess taxes on Form 1120 by creating an improvement fund. But under all circumstances make sure the board and the members know well ahead of time what your options are and what actions you are taking to protect the members against possible oversites and mistakes. If the members only want to be charged at the last minute maybe advise of differing tax concequences or set up a loan program so the members can draw down on the debt. This approach, however, can be extremely negative if payments are not made.
If it is too risky, avoid it. If it is too cumbersome then try to mitigate the obstacle. But if is the only avenue of revenue at least try to reduce the risk exposure to taxes. But above all be direct with your board and members in explaining their consequences if there is any chance of something going wrong. i.e. get it in the minutes.