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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