Federal 1120-H Line 12 and South Carolina State Tax Filing

Started by ErinH • 11 replies • 4419 views

💬 Join us to post & get advice from 50,000 HOA & Condo leaders.

⚡ Takes 30 seconds

Already a member? Log in

ErinH (Tennessee)
Posts: 4

Posted:

Hello everyone,

I am Treasurer for my HOA. I have been reading this forum for about 3 hours and have been unable to find definitive answers to the following two questions so I am hoping someone can assist.

1) Our only gross income each year comes from interest earned in a money market (usually between $40 and $200 annually). When preparing the 1120-H for the last two years, I have not taken any deduction on line 12 for "Taxes and Licenses". We have no license fees, and we have not paid any state tax historically. We have paid small amounts of federal tax for the last several years on the interest income from our money market. The 1120-H instructions do not describe the line 12 deduction. I have read some people who say that state tax paid can be deducted, but I have read others who say that the previous year's federal tax paid can be deducted.

QUESTION: can the previous year's federal tax be included on line 12 as a deduction against the current year's gross income? Do you have any supporting documentation to back up your answer?

2) I have been unable to determine whether we are required to file a South Carolina return and pay South Carolina income tax on our interest income. The instructions for SC1120 state that "Homeowners Associations filing federal Form 1120H with no taxable income" are NOT required to file. We do, however, have taxable income (albeit small) most years. I called the South Carolina tax office today and the woman I talked to said that since our interest income is earned as a part of our normal business as an HOA, we do not need to file a return. I was unsure whether she knew what she was talking about.

QUESTION: can some South Carolina HOA officers let me know if you are filing a SC1120 to report the small amount of investment income you earn annually?

Many thanks to all for your help!
Erin

TimB4 (Tennessee)
Posts: 21,059

Posted:

Erin,

For the SC return, you answered your own question:

The instructions for SC1120 state that "Homeowners Associations filing federal Form 1120H with no taxable income" are NOT required to file.

In the years your Association had to pay zero taxes (per Federal 1120-H), the Association did not have to file a SC return. In the years your Association did have to pay federal taxes a SC return should have also been filed.

For #1, I will defer to the members of this forum that work in the field.

Tim

ErinH (Tennessee)
Posts: 4

Posted:

Tim,

I agree with your logic. However, I am unable to find any information pertaining to South Carolina HOAs filing tax returns after extensive Google searching. I was also thrown off by the woman at the state tax office today who told me we do not have to file.

I'm hoping some SC residents will be able to provide insight...

BruceF1 (Connecticut)
Posts: 2,535

Posted:

Quote:

Posted By ErinH on 11/27/2012 10:59 AM
1) Our only gross income each year comes from interest earned in a money market (usually between $40 and $200 annually). When preparing the 1120-H for the last two years, I have not taken any deduction on line 12 for "Taxes and Licenses". We have no license fees, and we have not paid any state tax historically. We have paid small amounts of federal tax for the last several years on the interest income from our money market. The 1120-H instructions do not describe the line 12 deduction. I have read some people who say that state tax paid can be deducted, but I have read others who say that the previous year's federal tax paid can be deducted.

The deductions on line 12 are ONLY for taxes and licenses related to production of the CURRENT year's NON-EXEMPT FUNCTION INCOME. You are allowed a standard $100 deduction on the current year's non-exempt function income in addition to any expenses directly related to the production of that income.

Federal taxes paid in a prior or current year may NEVER be taken as a deduction on any federal tax return, whether personal, trust, estate, partnership, corporate, homeowners association, or otherwise.

As to your second question, although I prepare federal and Connecticut (and a handful of other) state returns, I do not have any experience preparing South Carolina returns. However, from what you posted, my interpretation would be that you would have to file an SC tax return for those years you paid federal taxes. If someone from the tax office told you that you didn't have to file any return, my advice would be to have that statement in writing and signed by the person from the state office who said that. Sates often compare their returns to federal returns (in today's computerized society that's easy to do) and if that state comes back to you saying you own taxes that letter may come in handy. It won't get you out of having to pay any taxes that may be due, but it might cause the state to waive any resulting penalties.

ErinH (Tennessee)
Posts: 4

Posted:

Good advice - thank you!

I have done some further research in the past hour (I contacted another state bureau to ask the same question) and they confirmed that we indeed must file state tax returns any year in which we have federal taxes due. So I will be preparing back returns. It looks like our penalties will be very small because the amount due is very small.

ErinH (Tennessee)
Posts: 4

Posted:

Bruce - one further question ... are state taxes paid the previous year typically deducted on line 12?

BruceF1 (Connecticut)
Posts: 2,535

Posted:

Quote:

Posted By ErinH on 11/27/2012 1:24 PM
Bruce - one further question ... are state taxes paid the previous year typically deducted on line 12?

Erin,

I was about to give you the obvious answer: the taxes are claimed for the year you actually paid them. For example, suppose when you prepared your 2010 tax return you owed SC $24 taxes, which you paid when you filed your 2010 return in 2011. Then, when you filed your 2011 federal return in 2012, you would claim the $24 you paid in 2011. At least, that's how it would work with most of us who file our personal tax returns on the cash basis. But, in those cases we have other 2011 income, such as wages, that the deduction can be applied against. That's not true in the case of homeowners associations.

Suppose the association actually had no taxable income in 2011. The 2010 tax paid in 2011 can only be applied against that income, so what happens? Does that mean the feds owe us a refund? Or does it mean we lose the deduction? I'll have to admit, this is a situation I haven't encountered. Sorry, I'm going to ask my boss about this one. I love these puzzles!

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Erin

While I live in SC I am not a lawyer nor do I play one. I am not a CPA nor do I play one.

All that said, I would just move forward and do as you have learned versus address earlier years until the State of SC comes knocking on your door. I am not saying lie, I am say benign neglect. Keep the mea culpas until they come knocking on your door. I doubt they will.

Hope this helps.

BruceF1 (Connecticut)
Posts: 2,535

Posted:

Quote:

Posted By JohnC46 on 11/27/2012 2:28 PM
Erin

While I live in SC I am not a lawyer nor do I play one. I am not a CPA nor do I play one.

All that said, I would just move forward and do as you have learned versus address earlier years until the State of SC comes knocking on your door. I am not saying lie, I am say benign neglect. Keep the mea culpas until they come knocking on your door. I doubt they will.

Hope this helps.

John,
If you're saying CYA, I agree.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Quote:

Posted By BruceF1 on 11/27/2012 3:20 PM

John,
If you're saying CYA, I agree.

Bruce

When I say move forward, I do mean file the correct/appropriate/legal, etc. tax returns (federal and/or state) but let bygones be bygones...until someone comes knocking on your door.....LOL

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Bruce

Tax avoidance is legal...tax evasion is not.

BruceF1 (Connecticut)
Posts: 2,535

Posted:

Quote:

Posted By JohnC46 on 11/27/2012 4:37 PM
Bruce

Tax avoidance is legal...tax evasion is not.

No argument.

🎯 You've read this entire discussion

Join the conversation with 50,000 HOA & Condo Leaders:

✓ Ask follow-up questions
✓ Share your experience
✓ Get expert advice
✓ Access 350,000 discussions

Create Free Account →

⚡ Takes 30 seconds

Already a member? Log in here