Definition: Condominium associations, homeowners’ associations and cooperative housing corporations are the main types of common interest realty associations (CIRAs). The sole purpose is to serve the collective needs of the neighboring property owners. These are organizations of property owners who own or have the exclusive right to use their individual living quarters and share the exclusive use of certain property with all of the other property owners in the development.
Accounting: The basic financial statements of CIRAs are as follows: Balance Sheet, Statement of Revenues and Expenses, and Statement of Cash Flows. The American Institute of Certified Public Accountants (AICPA) guide states that CIRAs’ financial statements should be prepared on the accrual basis of accounting to be in conformity with Generally Accepted Accounting Principles (GAAP). Many CIRAs, however, maintain their accounting records on a modified cash basis during the year, recording assessments from members on an accrual basis but recording expenses on a cash basis.
There are two different methods of accounting. The nonfund reporting requires the disclosure of assessments that were used for purposes other than those for which they were designated. Fund accounting segregated the financial statement amounts into grouping based on the entity’s specific activities. There must be a total column to the financial statements, as they should be taken as a whole and not the financial statements of the funds individually.
Income Taxes: CIRAs are generally taxed as corporations. Residential condominium associations, homeowners associations, and time-share associations may elect to be taxed either under IRS Section 277 which file Federal Form 1120 (applies to certain membership organizations) or under IRS Section 528 which file Federal Form 1120-H(applies specifically to homeowners’ associations). Commercial condominium associations file Federal Form 1120. Cooperatives are subject to subchapter T and file Federal Form 1120. A few homeowners’ associations qualify as tax exempt organizations and file Federal Form 990. All CIRAs must file an annual tax return.
Section 277 requires the allocation of income and expenses between membership and nonmembership activities. Only its net nonmembership income is taxed at regular corporate rates.
Section 528 requires the allocation of income and expenses between exempt function activities and its activities for the production of gross income. It is not taxed on its exempt function activities but is federally taxed at 30% on its net nonexempt function income. Timeshare associations that elect IRS section 528 are taxed at 32%.
To qualify under IRC Section 528, at least 60% of the association’s gross income for the year must consist of exempt function income. It must be received from owners in their capacity as association members – not in their capacity as customers for goods or services. An association cannot qualify under IRC Section 528 unless at least 90% of its expenditures are qualifying expenditures. Qualifying expenditures are either current operating expenditures or capital expenditures that are made for the acquisition, construction, management, maintenance and care of association property.
Nonexempt function income results from three principle sources: Revenue from nonassociation property (includes interest, dividends, capital gains, et cetera), Revenue from nonmembers for use of association property (guest fees and other similar amounts) and amounts charged to association member for specific services (special use charges).
Nonexempt function income may be reduced by expenses attributable solely to that income (state income taxes) and other expenses that are directly connected to the nonexempt function income (relate to the allocation of expenses for either facilities, services, or personnel that are used for both exempt and nonexempt functions The court in Concord Consumers Housing Cooperative v. Commissioner, allowed 5% deduction of certain expense categories for the following services provided by a management company: preparing financial statements, attending board meetings, reviewing investments, making requests to withdraw monies, reconciling interest, checking interest rates at various financial institutions, changing financial institutions (or moving accounts at financial institutions) and making requests for reimbursements from reserve accounts. Other costs that may be allocated are: tax services, insurance, utilities, repairs and maintenance, security and janitorial services. We strongly suggest that CIRAs allocate their management fees to appropriate nonmembership activities and to invoice separately for that amount. Similarly, the portion of accountants’ fees for audit, accounting and tax services that relate to nonmembership activities should also be invoiced separately.
Sources: PPC’s Guide to Homeowners’ Associations and Other Common Interest Realty Associations, 17th Edition, August 2006 Internal Revenue Code, Effective January 2007
Homeowner Association Rates
- $375 Federal Form 1120-H and either NC or SC state return
- $75 Prepare Federal and State Tax Extensions
Most homeowner returns are prepared within 2 weeks of receipt of complete data. For new clients we need a copy of the prior year tax return. All clients must submit copies of Form 1099-INT (interest statements), copies of Form 1099-DIV (dividends), copy of insurance declaration page (that shows total insurance costs and dates of coverage), a copy of the last insurance bill paid in the tax year (if payments were made – this is needed for the prepaid insurance calculations), Accounts Receivable Ageing statement (if not kept on QuickBooks), detail on any checks written from the reserve account, year ending Balance Sheet and Statement of Income and Expenses.
We can provide (depending on your needs):
- Accounting and outsourced financial management
- IRS problem resolution
- QuickBooks Accounting Support & Training
- Reviews & Compilations
- Staff Training
- Tax Services
- Sales & Use Taxes
- Temporary Living Expenses
We have years of experience in working with Associations. Put our expertise to work for you by contacting us today.