Homeowners associations that file Form 1120 need to begin their planning on the first day of the tax year. It is not something to be done a month after the year-end. It is crucial to consider various factors when filling out this tax form. One of the most important aspects is maintaining the proper types of bank accounts. While most associations already have operating and reserve accounts, it is essential to realize that the IRS views reserves differently from industry standards. The IRS categorizes capital reserve accounts separately from non-capital items. Mixing these two categories can lead to commingling operating and reserve funds, jeopardizing the safe filing of Form 1120. The second step is conducting a reserve study that supports the specific capital purposes for reserve assessments. This is a mandatory requirement under Code Section 118. The third step involves creating a budget that aligns with the reserve study, ensuring consistent allocation of funds. The reserve study should state a specific amount to set aside for reserves each month, and the budget should reflect the same amount. The fourth step requires keeping separate records of operating and reserve transactions in the association's financial statements and general ledger. Most associations usually comply with this step without any difficulties. The members of the association must annually approve the election under Revenue Ruling 7604 to file Form 1120. This election provides protection from errors and offers greater flexibility. The Board of Directors should also ratify the membership action on this matter. The sixth step emphasizes the importance of keeping operating and reserve funds segregated. It is crucial not to commingle these accounts or engage in interfund borrowing. Any mixing of funds can negatively impact the safe filing of Form 1120. While the reserve portion of dues collected can be initially deposited into the operating account, it...
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1120 (Schedule G) Form: What You Should Know
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