Over the years I have heard many CPAs make presentations about the advantages of Form 1120 over Form 1120-H. Virtually all of those Telephone Number List discussions boil down to a single point - the 15% tax rate of Form 1120 versus the 30% tax rate of Form 1120-H. The position generally set forth is that it's crazy to pay taxes at a 30% tax rate on Form 1120-H when Telephone Number List you can just as easily pay taxes at a 15% rate on Form 1120. I am not aware of ANY tax practitioner, other than myself, who has ever included a dialogue of the Telephone Number List risk factors of Form 1120 as part of this discussion.
While the IRS no longer publishes statistics on homeowners associations, the last year they did so it was noted that approximately two thirds Telephone Number List of associations filed Form 1120-H. It was also reported that the average association reported $5,582 of interest income. With today's low interest rates, that number is probably now Telephone Number List substantially smaller. But let's assume that those old averages are still accurate and examine the differences between the two tax forms. To make the calculations easier, we will assume that deductions allocable against interest Telephone Number List income, composed primarily of tax preparation fees (fully deductible) and management fees (allocated at 10% deductible based on the Concord Consumers Housing Telephone Number List Cooperative v. Commissioner case), total $1,582, leaving exactly $4,000 as taxable income. (That makes this illustration easy to follow.)
Form 1120 - The $4,000 taxable income at 15% results in a tax of $600. Assuming no problems, that's all the tax liability. But if you apply risk Telephone Number List factors, the answer changes dramatically. Risk Factor #1 - What if the Revenue Ruling 70-604 election is disallowed (for several possible different reasons, as discussed in a previous article - see below) and that (assumed) $10,000 of excess member income becomes taxable? The tax just Telephone Number List increased by $1,500. Your tax savings not only just disappeared, but became multiples of the tax you would have paid on Form 1120-H. Risk Factor #2 - Worse yet, consider that the IRS audits this tax return and assesses tax on ALL your entire reserve balance because you didn't exactly Telephone Number List comply with the requirements to exclude reserves from taxable income.