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financeguru2, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 136
Experience:  Several years of complex tax experience
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BK CPA, I hope you are well. I was looking at the info that

Customer Question

Good evening BK CPA,
I hope you are well. I was looking at the info that you provided regarding 1120s and condominium associations. There is a unincorporated condo association established in 1985 that has never filed a Federal or Pennsylvania return. My understanding would be that all outstanding years should be filed. Please confirm and share your thoughts. I don't think an election can be made for 1120H due to timing limitations except for the 2014 tax year. - Please confirm. I have not seen the financials and they may need to be reconstructed from old bank records. Assuming bank statements exist to create financials, is the election to carry over excess member income available (rev ruling 70-604). Any experience with PA and implications of a unincorporated association filling a federal 1120? Technically there is no stock, so I am not sure if PA RCT 101 (Corporate Return) or other PA filing would need to be filed (i.e. partnership). Any insight, thoughts and comments would be great
Submitted: 2 years ago.
Category: Tax
Expert:  financeguru2 replied 1 year ago.

Hello. To answer your question, you are correct that all outstanding years should be filed. Since the 1120H election needs to be made on a timely filed return, you are correct that this election could not be made for any past due returns. While the election to apply revenue ruling 70-604 is quite vague, I would caution you against making this election for any past due returns, since that would subject you to high audit risk. I see no issues with making this election at the annual meeting of the association prior to the year ending. Also, regarding PA, the association would be exempt from the capital stock/franchise tax/filing Form RCT-101. Feel free to respond if you have any other questions. If I have completely answered your question, please rate the answer only once you are fully satisfied. Thank you.

Customer: replied 1 year ago.
Good morning,
I hope you are doing well. Thank you for confirming my understanding of the 1120H. The meat of the question, revolves around rev ruling 70-604... the ability to carryover excess contributions. Electing this treatment could have a very large impact on the associations tax liability. A discussion regarding best practices, potential pitfalls and how to make the work papers audit friendly/proof would be welcome. Regarding PA filing status... the question really turns on what would be the associations PA filing requirements, if any. An argument could be made that a PA partnership return would need to be filed as each condo owner possess a percentage interest in the association. That interest is used to collect assessments. In addition, any income from rental activities from common areas, interest/investments or vending services would also be allocated via these percentages. What forms do other unincorporated CA or HOA based in PA file? Do you have any experience with PA Home Owner Associations or Condo Associations? Although this was not in the original question, any experience with Philadelphia BIRT tax or the Net Profit tax? My understanding is that BIRT tax returns and a Net Profit Tax returns should also be completed. Insight regarding what would be consider income for Philadelphia purposes or even an example of completed BIRT and NPT returns by another Condo Association would be very helpful
Expert:  financeguru2 replied 1 year ago.

Regarding your question on the Revenue Ruling 70-604, you just need to make sure there is proper documentation in the minutes for the actual election. The actual calculations themselves should be prepared by your CPA, so that should take care of the rest of the support. Is your condo association incorporated as a corporation? If so, it would not file a partnership return. Also, the BIRT and NPT taxes are Philadelphia only taxes, so you would have to be within the city limits for them to apply for one. Secondly, your association is not organized as a for profit enterprise I believe. Therefore, it would not need to file BIRT or NPT. For this reason, the Federal 1120 should suffice for income tax filing requirements. No other PA filings are required. Feel free to respond if you have any further questions. Thank you.

Customer: replied 1 year ago.
Thank you for your quick response. I believe the answer is that the association needs to make this election each year before the fiscal year ends. As you note, this should be documented in the minutes. If this was not discussed / documented in the minutes, is the election lost? Being conservative, I tend to think the answer would be yes the election is lost but I am looking for guidance / best practice to address this situation from another CPA/Tax Professional who has dealt with this matter. I would be preparing the returns, as a result, I am looking for insight regarding best practices for avoiding any potential preparation pitfalls from some who has dealt with theses issues. I noted in the initial question that this was a unincorporated association. This why there is no stock and the question regarding a PA partnership return was raised. Unless a CA or HOA qualifies, applies for and receives nonprofit status from the IRS, the entity has reporting requirements. PA does not require a CA or HOA to incorporate. It is a common misconception that a CA or HOA qualifies for non-for-profit status because they do not have a profit motive. The condo is located in the Philadelphia region, thus the questions regarding BIRT and NPT. Reviewing the Philadelphia BIRT and NPT guidance, it does not appear that the association would meet any of the requirements to be exempt from the filing these tax returns even if their was a loss or de minimis income. Can you point to any guidance that supports your position that PA and Local returns would not be required to be filed? Would you be able to share any professional resources or contacts that may have dealt with these topics?
Customer: replied 1 year ago.
Good afternoon financeguru2,
I hope you are doing well. I do not want to provide a poor rating but my key questions are still open. I have received a few emails prompting me to rate your initial answers. Please let me know how you would like to proceed.
Have a great day!
Expert:  financeguru2 replied 1 year ago.

Thank you for your response. To answer your question, there is no specific guidance on when the election must be made, but for proper documentation and to be conservative, I suggest the election be made in the minutes. For the initial year, you could note in the minutes that the election is being made prior to filing the return, but that would involve more risk on your end. Given you have stated your risk tolerance is conservative, I would advise preparing all past returns with no election, as you suggested. I have yet to see a condo association that is unincorporated file as a partnership, although you would do so if not filing IRS Form 8832. I would advise that you examine this form and attempt to make a late election under reasonable cause. This would allow the unincorporated association to file as a corporation instead of a partnership. On the topic of Philadelphia taxes, the normal conduct of a condo association such as receiving assessments and providing for the citizens would not be taxable, since there is no profit motive. In a scenario where the condo association is renting out property or deriving income from investments in Philadelphia, those activities would be taxable. My primary source for this material is Section 103 of the Philadelphia BIRT regulations. In your case, you may also wish to confirm with the city directly that the condo association is not taxable, especially if non-traditional activities are being performed by the association. I want to make sure all of your questions are answered, so please feel free to respond for any other clarification. Once we have reached full satisfaction on the answer, feel free to rate the answer. Thank you.