Form 1120H Deductible Expenses?

[gregt75]

I have a new client who is a condo association. They file form 1120h every. Their prior tax preparer would take a percentage of utility expenses to offset the non exempt laundry income result in negative taxable income. I understand that but this year they what I believe is non exempt fee income on locker rentals. What can I use to offset this rental locker income? I read one site that said you can deduct management fees and tax preparation fees against non exempt income. Please advise. Thanks.

[Bees Knees]

TTB, page 18-17 says:

Exempt-function income. Exempt function income consists of
dues, fees, or assessments paid by property owner-members for
maintenance and improvement of the property. Income that is not
considered exempt-function income includes interest, dividends,
coin laundry income, vending machine income, rental of units
owned by the association, rental of garage parking and storage
areas, party room rentals, etc. If Form 1120-H is filed, net income
attributable to exempt-function income is tax free. All other income
is taxed at a flat rate of 30% (32% for timeshare associations).

Expenses. If Form 1120-H is filed, expenses must be allocated
between exempt-function income and other income. For example,
management fees may include services for maintenance of
common areas, as well as fees for managing the association’s
investments. Only the amounts allocable to taxable income are
deductible on Form 1120-H.

Allocation of expenses depends upon the expense. As mentioned, management fees can be for both tax-free and taxable income, and so you might allocate that expense based upon time spent, or income earned.

Other expenses that are for specific items might not be allocated. For example, if locker room rental fees are taxable income, and the homeowners associate incurs fees to repair those lockers, that expense would be 100% deductible against taxable income.

[gregt75]

Thanks. Does that mean I can take a percentage of the maintenance fees and allocate them to the maintenance of the locker rentals? Also, what about deducting the tax preparation fees? Can I deduct them against exempt income?

[Bees Knees]

If maintenance fees and tax prep fees are incurred for both tax-exempt and taxable income, then you can allocate them between the two and deduct the percentage of those fees that is allocated to taxable income. You cannot deduct any expenses that are allocated to exempt function income.