TimeSharing Today Page 47 May / Jun, 2018
Tax cuts and owners’ associations
By Lena Combs
In December of 2017, the President signed into law the Tax Cuts and Jobs Act, which provided sweeping tax changes for the first time in 30 years.
In more than 500 pages, the legislation contains numerous changes, some perceived as favorable and some unfavorable. In all of those pages, however, very little affects vacation owners’ associations.
Two choices
Historically, these associations have had two choices for filing incometax returns: Form 1120, U. S. Corporation Income Tax Return; and Form 1120-H, U. S. Income Tax Return for Homeowners Associations.
The Form 1120-H typically is the preferred tax return for filing among associations, because when compared to Form 1120 used by regular corporations, it is shorter, simpler, and avoids or decreases exposure to several significant challenges raised in past examinations by the IRS.
The tradeoff for the decreased exposure and simplicity of the 1120-H, however, is a higher income-tax rate( 32 percent for timeshare owners’ associations and 30 percent for others) than the graduated rates available if filing as a regular corporation on Form 1120.
The Form 1120-H requires meeting certain tests to qualify for use. Condominium and homeowners’ associations must meet a residential test as well as financial tests, expressed as minimum percentages of membership income and expenses compared to total income and expenses. They are charged income tax on net taxable income at a rate of 30 percent.
Timeshare associations, however, cannot meet the residential test, so for an additional two percent in tax( for a total rate of 32 percent), lawmakers enabled these associations to file Form 1120-H as well— if they meet the financial tests.
Another difference is that Form 1120 requires corporations to make estimated tax payments, but 1120-H does not. An association that files Form 1120-H can pay all tax due on the original filing date( or by the extension date) of the return without penalty.
New tax law
The Act did not change the tax rates imposed on filers of Form 1120-H. The 30 percent / 32 percent rates still apply. What changed is the regular corporate tax rate. Through 2017, corporations— including associations— filing Form 1120 were subject to a graduated tax rate system as follows:
Over |
But not over |
Tax is |
of amount over |
$ 0 |
$ 50,000 |
15 % |
$ 0 |
$ 50,000 |
$ 75,000 |
$ 7,500 + 25 % |
$ 50,000 |
$ 75,000 |
$ 100,000 |
$ 13,750 + 35 % |
$ 75,000 |
$ 100,000 |
$ 335,000 |
$ 22,500 + 39 % |
$ 100,000 |
$ 335,000 |
$ 10,000,000 |
$ 113,900 + 34 % |
$ 335,000 |
$ 10,000,000 |
$ 15,000,000 |
$ 3,400,000 + 35 % |
$ 10,000,000 |
$ 15,000,000 |
$ 18,333,333 |
$ 5,150,000 + 38 % |
$ 15,000,000 |
$ 18,333,333 |
- |
35 % |
$ 0 |
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