Nowadays, it’s fair to say that CPAs are seen as a magic genie who can resolve all problems. With HOA tax returns, you need to be careful though because most CPAs have a “specialty” area much like a surgeon will only perform surgery on one area of the body. That’s why you will need an HOA CPA.
Whether they choose partnerships, S-corps, or tax returns for individuals, most will stay in one area for the majority of their career. In order to cross over and learn a new section of tax law, it requires extensive research and more education.
With this in mind, the problem most HOAs face is that CPAs may be qualified in HOA tax returns but this doesn’t necessarily mean they have the experience to competently complete the returns. In this industry, experience counts because the more tax returns you complete and the more HOA tax issues you face the better your skill set. The tips and tricks you learn along the way become invaluable.
As you’ll know, HOA taxes are very different to taxes for individuals or small businesses. Thanks to a number of IRS statutes, the complex procedures require all available knowledge as well as experience to avoid mistakes. Today, we’ve listed five reasons why many CPAs might not be able to help you with HOA taxes.
Lack of Knowledge – Although it sounds obvious, most CPAs lack the knowledge to help HOAs with taxes. Even with the filing itself, very few realize there are two forms that can be used (Form 1120 and Form 1120-H). You can even switch between them from one year to the next. Many CPAs understand Form 1120 because it is standard for C-Corporations, but Form 1120-H is a unique beast (if you don’t know what you’re doing!).
1120-H – Following on from the previous point, it seems like the right place to discuss the 1120-H form itself. For many CPAs, they have not actually seen an 1120-H form. Even those who may have seen a question or two on the CPA exam, forget the questions let alone the answers.
Exempt and Non-Exempt Function Income – With HOA tax, exempt income means income that will not be subjected to tax and this is actually unique to HOAs. For the most part, it covers income received from the function of the HOA and this should be a significant percentage of all income. However, there are all sorts of caveats including the fact that income cannot come from members acting as customers.
Increased Risks – When filing a 1120 form, most CPAs will consider the tax benefits because this is the way their mind is (and has been) programmed for many years. However, HOA taxes require a slightly different mindset. While the initial taxes might be lower on a form 1120, the audit risk is much higher.
I would guess that up to 90% of all HOA audits are for those who filed Form 1120. With Form 1120-H, it’s much safer and there’s little risk of being audited and ending up with increased tax liability, interest, and penalties all rolled into one.
Too Busy – Finally, let’s not forget that a CPA will have time constraints throughout the tax season. When they finally open themselves up to new clients, they’ll look for clients in the same niche because this is where their expertise has been for many years. Sadly, most don’t even consider branching away because it requires an investment of resources they just don’t have.
If you are looking for a CPA to assist you with HOA tax returns, make sure that he or she has extensive knowledge and experience in the area. Just because someone is a CPA does not mean that he can get the job done.