The old adage “The only two certain things in life are Death and Taxes” may not be everyone’s favorite quote, but those few words have certainly endured the test of time. With that in mind, let’s explore some of the basics of what you should know in order to have your association’s taxes filed properly each year.
Most associations file either Form 1120-H or Form 1120 for their Federal income tax return each year. There are a few exceptions to this general rule of thumb, in which a select few associations file either Form 990 (and possibly Form 990-T as well) or Form 1120-C. For the sake of simplicity, we shall ignore those rare outliers in this discussion. It is also worth mentioning that certain states require a state income tax return to be filed, but your tax preparer will address that concern for you.
In the pursuit of your association’s tax compliance, you should then note the following:
Both Form 1120-H and Form 1120 have an original filing deadline of the 15th day of the 4th month after the close of the accounting year-end. In other words, if your association is a calendar year-end taxpayer (i.e., it has a December year-end) then your association’s tax return will originally be due by April 15th of the following year. Fiscal year-end taxpayers—that is, those whose accounting year ends in any month other than December—will need to adjust their deadline to correlate to this 15th day of the 4th month rule, as well as to the other rules that will be detailed shortly.
The previously mentioned original filing deadline is permitted to be extended to the 15th day of the 10th month after the close of the accounting year-end if the taxpayer files an extension of time to file by its original filing deadline. For calendar year-end associations, that means October 15th would be the extended filing deadline. It is important to note that an extension of time to file does not extend the association’s time to pay its total tax liability for the year. Meaning, if the association does not pay its tax in full by the 15th day of the 4th month after the close of its year-end, then the late payment penalty will apply. This explains why it is imperative that you provide your association’s financial information and signed engagement letter to your tax preparer as soon as possible, as that would then allow the preparer ample time to either prepare the tax return itself or prepare an extension with an appropriate extension payment, if an extension payment is estimated to be necessary.
The association must pay its full tax liability in by the 15th day of the 4th month after the close of the accounting year-end. If your tax return is prepared and provided to you before this deadline, then the related payment type will be classified as a “balance due” payment, if applicable. On the contrary, an “extension payment” represents a payment amount that instead estimates the total remaining tax liability of your tax return, which has not yet been fully prepared. Essentially, the extension payment is similar to the balance due payment—but with that one categorical nuance.
“Estimated tax payments” are entirely different, however. Estimated tax payments do not pertain to the tax year that is currently having a tax return prepared. Rather, they apply to the next tax year that you will have to file a tax return for in the future. Estimated tax payments are typically provided to an association for two main reasons.
First, estimated tax payments may be required to be paid by certain dates in order to prevent the association from owing what is known as an underpayment penalty. The underpayment penalty is not the same thing as the “late payment penalty,” and it only applies to an association who files Form 1120 instead of Form 1120-H.
Accordingly, the underpayment penalty consideration does not relate to an association who files Form 1120-H for a given tax year. With that being said, most tax preparers will perform an analysis each year to determine if Form 1120 or Form 1120-H is the more advantageous tax filing for a specific tax year. Accordingly, paying these estimated tax payments is highly recommended—should the need arise to file Form 1120 instead of Form 1120-H.
Second, estimated tax payments are generally provided to an association in order to give the association an idea of what its next year’s tax liability might be. This therefore assists the association when it budgets for its income tax expense each year. As such, it is considered a best practice for a tax preparer to provide an association with recommended estimated tax payments each and every year, as appropriate.
Example Detail of Relevant Dates – Assumes a Calendar Year-end
- Original filing deadline—April 15th
- Extended filing deadline—October 15th
- Balance due/Extension payment deadline—April 15th
- Estimated tax payment deadlines:
- Quarter 1 – April 15th
- Quarter 2 – June 15th
- Quarter 3 – September 15th
- Quarter 4 – December 15th
Basic Accounting Information
In order to prepare a tax return for your association, the tax preparer will generally need the following information and items at a minimum:
- Signed engagement letter for the service
- This should be returned to the tax preparer as soon as possible. Most accountants will not proceed with the tax return preparation without this signed contract, let alone prepare an extension of time to file in the meantime
- Balance sheet dated as of the year-end
- Income statement covering the entire annual period reported on the tax return
- Having “budgeted” amounts detailed out in addition to “actual” amounts is usually preferred
- General ledger detail for the entire annual period covered on the tax return
- Prior year tax return or the association’s Employer Identification Number (EIN)
- Having a copy of the prior year tax return is always preferred, as a prior tax return may have reported a tax-related carryover that affects the preparation of the current year’s tax return
- Governing documents
- CC&R’s, Bylaws, and Articles of Incorporation
- Having these documents are not technically required in order to prepare a tax return, but they may influence whether or not an association is required to file Form 1120 instead of Form 1120-H
As always, if you believe that you have additional information that may be relevant to an association’s tax return, this information should always be communicated and provided to your tax preparer so that they can assess the situation.
Jeremy Newman, CPA
Newman Certified Public Accountant, PC, 2021