How Do We Handle Income for Ancillary Operations for Tax Purposes?

How Do We Handle Income for Ancillary Operations for Tax Purposes?

Ancillary operations are any association activities outside of the normal operations of the Association. Common ancillary operations include:

This income needs to be accounted for separately on the financial statements of the Association if it is billed separately to unit owners – that is, it is not included in the regular assessment.
If members and nonmembers use the facilities, there needs to be an adequate accounting system set up to capture the income from members and nonmembers. In addition, the Association will usually need to track the usage between the two groups. For example, with a golf course, the Association should determine the number of rounds of golf played by members versus nonmembers or in a spa/exercise facility the Association should track the number of nonmembers and members that use the facility. Note: tenants are considered to be members for tax purposes.

Costs (both direct and indirect) will then need to be allocated between member and nonmember revenue. Again, the accounting system will need to properly set up to record these expenses.

Net non-membership ancillary income is taxable on both forms 1120 and 1120-H. Net membership ancillary income is taxable if form 1120-H is filed. However, for the 1120-H, IF the membership ancillary income is billed once a year, it may not be taxable.

The IRS has been clear that the Association cannot take a loss on the ancillary income to offset other taxable income, such as interest earnings.

As seen above, there are complexities with regards to taxation of ancillary operations. Associations with ancillary operations should discuss their unique circumstances with their tax preparer and ensure that the accounting systems are set up from the onset so that income and expenses are properly captured to determine the correct tax treatment at year end.