Correct tax returns after audit?

Tony,

Oh, dear. This can get messy. You really need to consult a CPA or tax professional in your area to help you. Even though I do prepare tax returns for my employer's clients, there is still not enough data for me to be able to come to any reliable conclusions. As a professional tax preparer, I do have to tell you that you should file amended returns. The statement from your auditor is only a report of his findings. It does not absolve your association from preparing proper returns and paying any tax that is due.

First, to qualify to file Form 1120-H:

1. Your non-exempt function income cannot exceed 40% of your gross income (exempt function income plus non-exempt function income).

2. At least 90% of your total expenditures for the year must be related to caring for association property. Allowed expenditures include things like lawn care, maintenance and repair of association property, insurance, property manager's fees, bank fees, professional fees (legal, accounting, etc.), state fees and/or taxes, bank fees, and so on.

Assuming that your only non-exempt function income other than interest on deposits is only clubhouse rental, then your deductible expenses against producing that income would be related to the clubhouse. Our association also rents our clubhouse, but the income from that activity is so small that typically we do not go to the trouble of claiming any deduction other than the standard $100 deduction. And believe me, it's a lot of trouble if all we're talking about is clubhouse rental.

First, you would have to determine the percentage of time the clubhouse is rented. For that, you would divide the number of hours in the year that the clubhouse is rented by the total number of hours in the year. Then, you would have to take the depreciation of the clubhouse and multiply that figure by the percentage you obtained and enter that amount on line 14 (after completing Form 4562). Then, you would take the total cost of maintaining the clubhouse (utilities, repairs, any other costs such as cleaning and routine maintenance) and multiply that by the percentage use that you obtained earlier, and enter that amount on line 15. Any expenses directly related to the rental (such as cleaning the clubhouse after each rental) may be added in without applying any percentage.

You really should consult a professional to help you through this. Perhaps after a professional has helped you prepare a proper return, someone might be able to prepare future returns on their own.

I concur with Bruce.

The issue is that we have not recognized the appropriate amounts of non exempt income in 3 of the last 4 years. The annual amounts of NE Income range from 3 to 7k per year. Now that we have had our audit, it seems logical that we would take the next step and verify that the HOA does not owe taxes and get it cleaned up for the next Board and next tax return.