Federal Taxes
Employer (Tax) Identification Number (EIN). All associations must file for an EIN with the IRS. IRS Form SS-4 is used for this purpose. IRS also has an online process on its website, www.irs.gov. This number is used in all Federal and state income tax filings. Banks will also require the number to open bank accounts. If you are a new director or manager for an existing association, you should be able to find the number on a 1099-INT issued by the bank for interest earnings or a prior-year tax return. The association’s tax preparer will have the number.
Federal Income Tax Return. All associations must prepare and file a tax return with the IRS at the end of each year, regardless of size. For associations with a calendar year (December year-end), the return is due March 15. A six-month extension of time can be obtained by filing IRS Form 7004.
1. Form 1120-H. Most associations file Form 1120-H. With this form, there is no tax on exempt income, i.e., assessments. Other sources of revenue, such as bank interest, laundry machine income, etc, are taxed at a flat 30% rate. Because Form 1120-H is designed specifically for associations, it carries little or no tax risk. To qualify for this form, at least 60% of the association's gross income must consist of exempt income, i.e., regular and special assessments, and fees used to manage and maintain the property. If an association files Tax Form 1120-H, Revenue Ruling 70-604 does not apply, and an excess income tax resolution is not needed.
2. Form 1120. Form 1120 is used by for-profit corporations. Sometimes, large associations with significant taxable income will file this form. This form carries a higher audit risk.
Payment of Tax. If tax is owed on a Federal return, the tax must be remitted using the IRS Electronic Funds Tax Payment System (EFTPS). Go to www.eftps.gov to enroll in the program or make a payment. To enroll, you will need the association’s name, mailing address, and EIN. You will also need the routing number and bank account number. The IRS will issue a PIN to access your account information when you pay. To make a payment, you must know the tax form and the period to which it applies.
California Taxes
Franchise Tax Board. All corporations are taxable when formed in California. As such, they are subject to an $ 800-per-year minimum tax by the California Franchise Tax Board (FTB). To obtain tax-exempt status under Revenue and Taxation Code 23701(t) (no longer subject to the minimum tax), the Association must file Form 3500 with the Franchise Tax Board. Governing documents and income and expense information are submitted to the FTB. If the association has been in existence for several years, it may request additional information to verify its tax-exempt status. If the association has tax-exempt status, it is only subject to tax on its nonmember income, such as interest, not on its assessments.
Verify if the association is tax-exempt. The FTB lists all tax-exempt corporations in California on its website. The list shows the California Corporation Number (different from the EIN), the corporation's name, the city, the fiscal year-end, whether the corporation is exempt, and whether the corporation is “active” or “suspended” by the California Secretary of State (SOS) or the FTB. The list can be located using the search feature on the FTB home page.
Check to see if your exempt status has been revoked. Recently, the FTB contacted many associations and other tax-exempt organizations in its database to determine whether they still existed. Those who did not respond to their inquiries have had their exempt status revoked. If you believe that your association had been exempt at some point and you cannot locate it on the tax-exempt list, you can check the revoked exempt organization list. If your association’s exempt status has been revoked, you must file for it again using FTB Form 3500, referenced earlier.
California Income Tax Return–Form 100. If the association has more than $100 in nonmember income (e.g., interest), it must file a corporate income tax return with the FTB (even if it is not incorporated). Form 100 is used for this purpose, and any taxable income is taxed at a flat rate of 8.84%. Payment can be made by check, and quarterly estimates may be required in future years (Form 100-ES). I recommend that, even if the association has less than $100 in nonmember income, the association file the return anyway to stay in the FTB’s system and avoid FTB correspondence later about why you didn’t file a return.
Small Tax Exempt Organizations–Electronic Return Form 199N. Tax-exempt organizations with $50,000 or less in total revenues (assessments, interest, laundry income, etc.) must file an information return electronically each year with the FTB. Complete filing instructions and information needed can be found on the Franchise Tax Board website. There is no filing fee with the 199N filing. The return is due 4 ½ months after the end of the fiscal year (May 15 for a calendar year association). A small association can also file Form 199 on paper. See the following discussion.
Exempt Organization Annual Information Return–Form 199. For tax-exempt organizations with gross revenues exceeding $50,000, a paper Form 199 is filed with the FTB. There is a $10 filing fee to remit with this form (none if revenues are less than $50,000). The return is due 4 ½ months after year-end, but is automatically extended six months if needed. If the form is filed after the extension period, the fee can increase to $65 plus interest. An association with revenues less than $50,000 can elect to file a paper 199 instead of the 199N.
Corporate Filings - California Secretary of State
Articles of Incorporation–Corp #. When an association is incorporated, it submits articles of incorporation to the California Secretary of State (SOS). SOS assigns a 7-digit corporation number and returns the recorded articles to the association.
Statements of Information and Common Interest Development. Associations must file these two separate statements with the SOS every two years. The Statement of Information lists corporate officers, agents for service of process (who receive the papers if the Association is sued), and if the Association is subject to the Davis-Stirling Act (yes). A $20 fee is required. This form can be filed online. The Statement of Common Interest Development requests information about the managing agent, the president, the number of units/lots, and the street address of the association. There is a $15 fee to file this form, but it cannot be filed online. These forms are due at the end of the association's incorporation month. For example, if an association was incorporated on March 6, 1984 (an even year), its forms would be due on March 31 of every even year. An association incorporated on August 30, 2003 (odd year) would have its forms due on August 31 of each odd-numbered year.
The SOS usually mails a postcard to the Association's address on file about 90 days before the forms are due. If there has been a change in officers or management in the past two years, you may not receive the postcard. Forms are no longer mailed to the Association. Until recently, the SOS office was severely backlogged in processing these forms. Sometimes, processing these filings took the SOS 4 months or more. As of January 2014, the processing time is down to two weeks. Forms that are incomplete or not completed correctly will be returned to you for correction. Do not set these aside. Refile them as soon as possible. If there has been a change in the address, officers, or agent of service within the past two years, an amended filing can be made at no charge.
The SOS forms are not tax forms. These forms are not prepared as part of the income tax return process. In most cases, the incorporation month is not the same as the fiscal year-end, so the due dates will not coincide. Since the SOS forms are due every two years and income tax returns are filed annually, there’s no correlation between the due dates. These forms can be completed by your managing agent or yourself. Your tax preparer may be able to assist.
Penalty for Failure to File. If the association does not file the SOS statements by the due date, the SOS will impose a $50 per return penalty for failure to file. What can be confusing about the penalty is that the penalty notice comes from the Franchise Tax Board, even though it is an SOS penalty. So when the notice is received from the FTB, an association may think it is an income tax penalty or fee and not realize that it is from not filing with the SOS. If you receive any notice from the FTB (or the IRS), have your tax preparer review it to understand the nature of the charges. Failure to file the SOS statements can lead to Corporate Suspension. See the discussion following.
Third Party Solicitations. Some companies conduct mass mailings offering to prepare the Association's annual meeting minutes. The solicitation suggests that you are meeting state requirements if you use their “service.” The following is from the SOS website:
The Secretary of State’s office has been advised that solicitation letters are being sent to California businesses encouraging them to comply with their California Corporations Code filing obligations by submitting fees and documents to a third party rather than by filing directly with the Secretary of State’s office.
Misleading Statement of Information Solicitations: Certain private companies have been soliciting business through mass mailings to corporations and limited liability companies, using solicitations similar to a Statement of Information that must be filed with the Secretary of State. These solicitations are not being made by the California Secretary of State’s office and are not being made by or on behalf of any governmental entity. Although a business entity can use an intermediary to submit filings and fees to our office, no business is required to go through another company to file its documents with the Secretary of State’s office.”
Taxes on Interest Earned
Interest on investments is taxable income. If the interest is part of your reserve study's funding plan, transferring the interest from your reserve account to pay taxes qualifies as "borrowing" from your reserves, which must be repaid. If that is the case, there should be a line item in your budget for taxes, which are paid out of the operating account. If the reserve analyst considers the interest earned on reserves as net after tax, the interest can be applied toward taxes. Boards should work with their reserve study provider and CPA to determine the best approach.
Suspended Corporation
Failure to file tax returns can result in suspension of an association's corporate status.
Reserves as Capital Contributions
See the article by Gary Porter, CPA, on the tax rules for reserve contributions.
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