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Interest Income and Form 1120-H

Started by GerryF • 6 replies • 230 views

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GerryF (Ohio)
Posts: 3
Posted:
I found this text in one of my HOA and Form 1120-H queries:

"Most associations avoid paying tax by carrying forward any potentially taxable (interest) income by applying it to the next year's budget."

Any truth to this? Knowledge re. how it is actually accomplished? Thank you.
LetA (Nevada)
Posts: 2,679
Posted:
Basically yes, I would suggest your board have their taxes completed by a CPA and not a tax "professional"
cough cough store front place.
ElleN (Idaho)
Posts: 4,420
Posted:
Quote:
Posted By GerryF on 05/06/2024 8:01 PM
I found this text in one of my HOA and Form 1120-H queries:

"Most associations avoid paying tax by carrying forward any potentially taxable [redaction by ElleN] income by applying it to the next year's budget."

Any truth to this?
It is false. Interest income from the reserve account is taxable in the year it was received. Elaboration follows.

The above appears to be a quotation from this management company site: https://ams-nw.com/ufaqs/does-an-hoa-need-to-pay-income-tax/. The exact quote from the latter is this:

The only non-assessment income most associations generate is interest on association funds. Federal and state income tax is owed on this income to the extent it exceeds $100 per year, but most associations avoid paying tax by carrying forward any potentially taxable income by applying it to the next year’s budget.

In my opinion this web site mangled verbiage from other sources to come up with the above, highly misleading and inaccurate paragraph. I expect the source of the confusion is the many tax-illiterate managers and directors alike who serve HOAs. Many of the latter are ill-equipped to communicate complex financial and tax topics.

The IRS ruling that has led to this confusion is Revenue Ruling 70-604. Among other things, RR 70-604 speaks of carrying forward to the next year excess membership income when certain conditions are met. Interest from reserve accounts is not "membership income."

References:
https://hoacpa.com/wp-content/uploads/2018/08/FAQ-What-Is-the-Election-or-Revenue-Ruling-70-604-.html

https://hoatax.com/guide-revenue-ruling-70-604/

https://www.revenueruling70-604.com/

https://cai-rmc.org/Blog/7831601

BruceF1's second post at https://www.hoatalk.com/Forum/tabid/55/forumid/1/postid/128528/view/topic/Default.aspx
LetA (Nevada)
Posts: 2,679
Posted:
Ellie, in a way the taxes are indeed paid, but isn't the carryover and any deductions swallowed by the tax owed?
Similar to a personal 1040? On the surface one shows tax owed is X$ and then comes the deductions making the tax owed
somewhat lower. I feel this is what the OP was thinking.
AidylP1 (California)
Posts: 108
Posted:
Quote:
Posted By LetA on 05/07/2024 10:33 AM
Ellie, in a way the taxes are indeed paid, but isn't the carryover and any deductions swallowed by the tax owed?
Similar to a personal 1040? On the surface one shows tax owed is X$ and then comes the deductions making the tax owed
somewhat lower. I feel this is what the OP was thinking.

You should have had a "tax professional" do the taxes!
ElleN (Idaho)
Posts: 4,420
Posted:
Quote:
Posted By LetA on 05/07/2024 10:33 AM
Ellie, in a way the taxes are indeed paid, but isn't the carryover and any deductions swallowed by the tax owed?
No. I think you have some vocabulary confused. To get some command of the issues here, pull up a Form 1120-H. Look at Lines 8, 16, 17, 18 and 19, for starters. Focus on how taxable income is computed.

Make no big assumptions about what each line involves. To compute what goes on each line, one has to read the instructions for Form 1120-H and possibly be a tax professional.

Quote:
Posted By LetA on 05/07/2024 10:33 AM
Similar to a personal 1040? On the surface one shows tax owed is X$ and then comes the deductions making the tax owed
somewhat lower. I feel this is what the OP was thinking.
Likewise, this is not how Form 1040 is structured. Please pull up a 2023 Form 1040. Rough order of computations:

Compute income from wages, interest, dividends, pensions, IRAs, cap gains and the like.

Compute adjustments to income.

Compute deductions (standard or itemized) from income.

Compute taxable income i

Compute tax owed before various credits are taken into account.

Compute tax after taking into account various credits.

LetA (Nevada)
Posts: 2,679
Posted:
Thank you Elen, that makes better sense.
Basically same church, different pew lol.

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