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CGCPA
CGCPA, CPA
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Experience:  over 40 years experience in tax matters
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What is the best entity structure for a group of 8 people jointly

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What is the best entity structure for a group of 8 people jointly owning a houseboat and how should annual dues be handled? Are homeowners groups like this typically for-profit or not-for-profit and what does that really mean?

The entity currently is a corporation. It takes in about $18000/year in dues and extra charges and on the average spends about the same. It last filed taxes in 2008 at which time the dues were counted as income. Presumably it should have been filing a tax return. Should it go back and file the missing returns?

It would seem bad if the entity had to pay tax in the years that we are trying to build up the contingency fund. Eventually, the entity will dissolve and possibly distribute more than $100k to the owners and it would be nice if there were not a capital gain tax.
Submitted: 1 year ago.
Category: Tax
Expert:  CGCPA replied 1 year ago.

Welcome to Just Answer. I am here to help you resolve your tax and finance concerns. Please feel free to ask anytime you need extra help.

 

The best entity type for owning the houseboat would be either a corporation (as you have) or an LLC. They both provide protections in the event there is ever a lawsuit and through those legal protections your loss is limited to the amount you have invested.

 

Most homeowners associations are formed as non profit organizations and file accordingly. This is not the same as a registered charity and they may need to pay tax on any profits realized. However, since you state that the income is similar to the expenditures it should not be a concern. The cost, in taxes, if any, should be small.

 

My concern is that you have not filed tax returns for this corporation. They must be filed every year. Therefore, I recommend that all the prior year returns be filed as quickly as possible or the corporate entity may be dissolved and the legal protections would be removed. This potential risk factor would far outweigh the possible benefits and costs.

 

Unfortunately, there is way around the tax on capital gains.

Customer: replied 1 year ago.

Can the annual dues be treated as capital or are they income? Are you saying that we should pay a nominal amount of tax whenever the dues are greater than the outlay minus any loss that was carried forward?


 


What happens to the money if a homeowners association organized as a non-profit dissolves? Can the money be returned to the members? Is that a difference between this sort of non-profit and a charity?


 

Expert:  CGCPA replied 1 year ago.

The dues are income. They cannot be treated as capital. When income exceeds expenses the corporation will need to pay tax. However, if expenses exceed income in a specific year, thus creating a loss, that loss can either be carried back or forward. You can read more about loss carryovers at www.irs.gov

 

A homeowners association organized as a non-profit may, upon dissolution, distribute any remaining funds to its members or to a registered charity. However, if the distribution is generated as the result of operations or the sale of its assets for more than their undepreciated value, taxes must be paid first to avoid the pursuit of the members by tax agencies.

 

This is one of the differences between a non-profit and a charity. A charity may only, upon dissolution, expend remaining assets to another charity. The organizational purposes of the two entities are different as well. While a charity is formed to benefit others a HOA is organized to benefit its members.

Customer: replied 1 year ago.

What is the advantage of organizing as a non-profit corporation versus a for-profit organization as you say many homeowners associations are?

Expert:  CGCPA replied 1 year ago.
I did not state that many HOA's are organized as for profits, simply that an HOA cannot receive charity recognition. Non-profit simply means that there is no profit motive in the entity's goals. Thus, many HOA's simply organize as standard corporations eliminating the reporting requirements some states impose on non-profit entities. There are simply no advantages to seeking charity recognition which cannot be realized.
Customer: replied 1 year ago.

Sorry, my sentence was poorly constructed. I meant what is the advantage of organizing and filing as a non-profit if it still has to pay tax on dues?


 


Can ownership of a houseboat be considered as a homeowners association? I see some rules specifically for filing 1120-H.


 


I am still not sure what the final answer to the question is. Should we organize as a non-profit corporation? What tax return would we file? Can we do this for the past years?

Expert:  CGCPA replied 1 year ago.

A non-profit pays taxes on its net, non related income. Thus if dues are $5,000 and expenses are $4,000 and there is no income from other sources, there is no income tax even though there is a net income of $1,000. The expenses allowed in this way are only those related to the entity's purpose. However, if the houseboat is rented to a non-owner for a period of time that income, net of expenses directly connected to the rental period, will be taxed.

In a regular corporate setup there will be a tax on the excess of income over expenses if the organization files a regular corporate return rather than an HOA return.

A houseboat can be considered an HOA.

You previously stated the organization was set up as a corporation. To get the most from the tax filings you should file as an HOA using form 1120-H. You can file this return form for all open tax years to get the organization current and protect the corporate legal protections.

CGCPA, CPA
Category: Tax
Satisfied Customers: 3738
Experience: over 40 years experience in tax matters
CGCPA and 4 other Tax Specialists are ready to help you
Customer: replied 1 year ago.

It looks as though an 1120-H that owes no tax incurs a minimum penalty of $135 per year. In filing the past years would it be better to file an 1120 if there was no net income over the time period and then start filing as an 1120H so that dues are not taxable? Or is it better to fill the 1120Hs and home to convince the IRS that the corporation had reasonable cause for not filing on time?


 


 

Expert:  CGCPA replied 1 year ago.
Unfortunately, filing late returns will always incur the late filing penalties. No filing method will avoid that. Additionally, filing should always be consistent. Thus, if you select to file an 1120 for earlier years (the catch up years) they must all be filed that way. If you elect to file an 1120-H that must be consistently followed. In the new year and for future periods you can elect to file the 1120-H. I am at a loss to find an appropriate explanation which would cause the IRS to abate the late filing penalties when there are multiple persons involved who could have filed on behalf of the corporation.
Customer: replied 1 year ago.

The penalties for late filing of an 1120 appear to be much, much higher than $135/year which appears to be the penalty for 1120H. But it looks as though the IRS does not have to accept a late election to file as a homeowners association. Might it be better to just start over with a new corporation? No present day owner has received any notice from the IRS.

Expert:  CGCPA replied 1 year ago.
A new corporation would be a better choice if you are able to get the houseboat title changed. It would require lender approval if there is a loan involved.
CGCPA, CPA
Category: Tax
Satisfied Customers: 3738
Experience: over 40 years experience in tax matters
CGCPA and 4 other Tax Specialists are ready to help you

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