How Do We Budget for Income Taxes?

Association taxation can be complicated. However, the budget is simply an estimate. Due to the fact that the budget is prepared long before the tax year is over, the best way to budget for income taxes is simply and conservatively. There are various tax options available to associations that may reduce Federal income taxes, but depending on the Association’s actual facts and circumstances these options may or may not be available at the time of tax return. Thus, we recommend budgeting as follows:

• Estimate Interest Income that is earned on all bank accounts including accrued interest on certificates of deposit
• Estimate other non-membership type of income that would be taxable – e.g. cell tower lease, unit rental income, etc.
• Estimate per-use fees (that are not charged monthly) – e.g. RV parking, storage, etc.
• Deduct tax preparation fee. For C&C clients this amount would be $2090.
• Deduct any “direct expenses” against taxable income (e.g. utilities, repairs, etc.)
• Deduct a portion of the management fee. For C&C clients we use 5% of the management fee up to 10% of taxable income (if professionally managed).
• Compute 30% of the sum of the above for income tax expense.  It is more conservative to assume that form 1120-H will be filed.

Below are a couple of examples to give you an idea of the computation: