Can Expenses Be Deducted from Taxable Income?

Direct expenses can be deducted from taxable income. Actually, the IRS is more lenient with its interpretation of the rules with form 1120 than 1120-H, but most tax preparers take standard deductions against interest income for such items as management fee and tax preparation. That amount varies. In our firm, we take 5% of the management fee, up to 10% of the taxable income, unless the Association has documents showing otherwise. The tax preparation fee is deducted in full.

The “lost” deductions are generally those related to income other than investments. If the Association has rental property, income from a billboard or cell tower, advertising in the newsletter or other nonassessment types of income, often the accounting system has not been set up to “capture” these expenses.

TIP – Make sure that the Association books are set up so that any expenses related to the taxable income are clearly designated on the financial statements. Ensure that managers and board members know to classify expenses correctly as they are approved for payment.

For some type of per use income, a “one time” analysis might be beneficial. For example, in California, the State taxing agency has determined that laundry income is always a losing venture, so after years ago auditing laundry income and expense, they now concede that if an Association will just consider laundry income and expense as “break-even” they will not audit the issue. The IRS has not audited laundry income, to my knowledge, but they could. If there is a significant amount of money on a recurring per-use item, such as laundry, the Association may want to do its own analysis to ensure that there is not net taxable income and extrapolate those findings to future years.