IRS Form 1120-H... Anyone using it?

Year after year, prior Boards spent every dime we took in leaving virtually nothing in reserve funds for long term projects like road re-pavement, and thus our HoA paid virtually no corporate income taxes under form 1120 during their tenure. Now that our Board is actually saving money into reserve funds, we are getting a hefty IRS tax bill every year.

I did some research and found IRS tax form 1120-H which, from what I am reading, would exempt our reserve fund savings from being taxed. Our accountant was unfamiliar with it when I brought it up last year, but surmised it would not help us. I am skeptical of his advice.

From just looking at the form 1120-H, it looks like a simple one page form a lot less complicated than form 1120.

Anyone have any experience with 1120-H?

The Association has used it every year since it was adopted.

Here are a couple of threads about it:

Subject: Filing form 1120H
Subject: Reserve Fund and 1120H form
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Thanks Tim for the info.

This is looking like a tax filing form so simple that you do not even need an accountant for. Or am I missing something?

Yup. It really is that simple. You can fill it out yourself. It's easier than doing your own personal taxes.

You said your accountant was not familiar with Form 1120-H? And, he prepares taxes? You need another accountant.

Homeowners Associations can qualify to use form 1120-H instead of the standard corporate form, 1120. The rules are given in 26cfr1.528. But, you don't need to read that. Just follow the instructions for filing form 1120-H.

Here are some things to keep in mind:

1. Lines A through E are not used in calculating any tax you may owe. That part of form 1120-H is what is called an information return. The IRS uses the information you give on lines A through E to determine if your association qualifies to use form 1120-H.

2. To qualify to use form 1120-H, 60% of your income must be "exempt function income." Traditionally, exempt function income is income from your assessments. No more than 40% of an association's income can be other income (sometimes called "outside" income). Examples of other income would be interest received on deposits, rental of association facilities, such as a clubhouse, and so forth. So long as your association qualifies to use form 1120-H, none of your exempt function income (assessments) is taxed, not even the portion you put into reserves.

3. To qualify to use form 1120-H, your association must also meet the expenditure test. At least 90% of your expenses must be expenditures which are properly allocable to the acquisition, construction, management, maintenance or care of association property. Examples include: paving of streets, driveways and parking lots/spaces, management, accounting and legal fees, insurance, lawn care, maintenance and utilities associated with common facilities, snow removal, etc. Note that money you set aside for reserves is not considered as an expense. That money becomes an expense only when you take it out of reserves and use it. No more than 10% of your annual expenses can be for things not related to operating your association.

Yeah I did notice the % tax rate is higher for 1120-H. But from what I am seeing, we should still come out way ahead. Our only taxable income would be interest income which was a paltry $120 last year. Whereas the $25,000 we saved into our road reserves was taxed using the 1120 form and our total federal income tax bill was almost $4,000!

So you guys and gals using form 1120-H, do you have an accountant do it or do you just have your treasurer fill it out?