Should a co-op housing association file Form 1120 or 1120-C for tax purposes?

12 Thanks for the info! I'm in a similar situation. If we do switch from 1120 to 1120-C, would we need to amend previous years' returns? We've been filing 1120 for like 8 years now.

5 You typically don't need to amend previous returns, but it depends on the specific circumstances. If the cooperative was eligible for specific deductions under Subchapter T that weren't claimed, there might be benefit in amending recent returns (generally up to 3 years back). Filing Form 3115 is usually sufficient to document the change going forward. The IRS generally considers this a change in accounting method rather than a correction of an error, assuming the cooperative truly qualifies for 1120-C filing status.

14 Does this tool actually work with complex entities like co-ops? I've tried other "AI" tax tools and they usually just spit out generic advice that isn't helpful for specialized situations.

19 I'm wondering the same thing. Also, if you switch forms, does the system help with the transition paperwork? Our accountant mentioned something about needing special forms to change filing types without triggering an audit.

8 Yes, it actually does work for complex entities. What impressed me was how it identified specific Subchapter T provisions that applied to my client's situation - not just generic advice. It recognized their tenant-stockholder structure and identified the appropriate tax treatment. Regarding transition paperwork, it provided the template for Form 3115 (Application for Change in Accounting Method) and explained exactly which method change number to use for the switch from 1120 to 1120-C. It also outlined which supporting documentation would strengthen the case for the change without triggering audit concerns.

22 Wait, how does this service actually work? I thought it was impossible to get through to the IRS these days. Is this legit or just another scam trying to get access to sensitive tax info?

19 Sounds too good to be true. The IRS wait times are legendary - how could some service magically get you through faster? And even if you do get through, would they actually give useful guidance on something specialized like cooperative tax status?

7 It works by using their automated system to keep calling and navigating the IRS phone tree until they secure a place in line, then they call you when an agent is about to be available. Nothing sketchy - they don't ask for or need any sensitive information, they just do the waiting for you. Regarding the specialized guidance, you're right that not every IRS agent will be familiar with cooperative tax law. I specifically asked for someone in the business entity division who had experience with cooperative returns. It took an extra transfer, but I eventually got connected with someone knowledgeable who confirmed that 1120-C was appropriate for housing cooperatives that meet the Section 216 requirements.

3 Good point! What states did you find to be particularly problematic? We have co-ops in NY, NJ and CA that might need to make this switch.

17 New York and California both have specific provisions for housing cooperatives that can be affected. In NY, there's the cooperative and condominium tax abatement program that requires proof of cooperative status, which is sometimes verified through federal filing type. California has property tax implications related to Prop 13 that can be affected by how the cooperative documents its status. The documentation requirements can vary by county assessor. For NJ, I've found their Division of Taxation generally follows federal determination of cooperative status, but you should verify the change won't impact any local property tax assessments.

5 Not a stupid question at all! A cooperative housing association (typically called a co-op) has a specific ownership structure that's different from an HOA. In a co-op, a corporation owns the entire property, and residents own shares in the corporation along with a proprietary lease for their unit. HOAs, on the other hand, are usually formed when individual owners each own their own units plus a percentage interest in common areas. HOAs typically file Form 1120-H (U.S. Income Tax Return for Homeowners Associations), not 1120-C. So if your townhouse community owners each have deeds to their individual units, you're likely an HOA, not a co-op, and Form 1120-H would be appropriate (though some HOAs can also file 1120 in certain circumstances).

This is really helpful, Adrian! I'm new to dealing with cooperative tax issues and your checklist is exactly what I needed. Quick question - when you mention "patronage dividends or refunds distributed based on use/occupancy," does this include things like refunds of excess maintenance fees or utilities? Our co-op sometimes returns money to shareholders when the annual budget comes in under actual expenses, and I'm wondering if this would qualify as patronage dividends for 1120-C purposes. Also, do you know if there's a minimum number of units or shareholders required for cooperative tax treatment? The co-op I'm looking at has only 23 units, which seems small compared to most examples I've seen.

Great questions, Chloe! Yes, refunds of excess maintenance fees or utilities can potentially qualify as patronage dividends if they're distributed based on the shareholders' patronage (use/occupancy) rather than just their capital investment. The key is that the refunds need to be tied to the cooperative services provided - like maintenance, utilities, or other building operations - rather than being a return of capital. For your co-op's situation, if they're returning money based on each unit's proportional share of building expenses, that would likely qualify as patronage dividends under Section 1388 of the IRC. This is actually one of the main benefits of filing 1120-C - these refunds become deductible to the cooperative. Regarding the minimum size requirement - there's no specific minimum number of units or shareholders required for cooperative tax treatment. I've worked with co-ops as small as 8 units that properly filed 1120-C. What matters is the structure and operations, not the size. A 23-unit co-op is perfectly fine as long as it meets the other requirements I mentioned. You might want to review how your co-op documents these refunds in their books. If they're currently treating them as distributions of retained earnings, switching to 1120-C would allow them to properly characterize these as patronage dividends, which could result in significant tax savings.

That's a great point about mixed-use cooperatives, Kai! I haven't personally dealt with that specific situation, but I imagine the commercial income component would definitely complicate the transition from Form 1120 to 1120-C. From what I understand about cooperative tax law, the non-patronage income (like rental from commercial tenants) would be subject to regular corporate tax rates, while the patronage income from residential shareholders could benefit from the cooperative deductions. This dual treatment might require careful allocation of expenses and could impact the overall tax benefit of switching forms. I'd be really interested to hear from anyone who has experience with this type of mixed-use situation. Did you end up needing to segregate the commercial operations into a separate entity, or were you able to handle both income streams within the same 1120-C filing? The complexity seems like it might warrant professional consultation beyond what most of us deal with in purely residential co-ops.

I actually dealt with a mixed-use cooperative last year - 38 residential units plus 4 ground-floor commercial spaces. The transition from 1120 to 1120-C was definitely more complex than a purely residential co-op. We ended up keeping everything in one entity but had to carefully segregate the income and expenses between patronage (residential) and non-patronage (commercial) sources. The commercial rental income gets taxed at regular corporate rates on the 1120-C, while the residential operations benefit from the cooperative deductions. The key was setting up proper cost allocation methods to apportion shared expenses (like building maintenance, utilities for common areas, property management) between the two income streams. We used square footage and usage-based allocations depending on the expense type. One thing that caught us off guard - the commercial tenants' lease structures had to be reviewed to ensure they didn't inadvertently create patronage relationships. Standard commercial leases were fine, but we had to be careful about any profit-sharing arrangements or expense pass-throughs that might blur the lines. The tax savings on the residential side more than justified the additional complexity, and keeping it as one entity was much simpler than trying to split operations. Just make sure your accountant is familiar with the dual income stream treatment under Subchapter T.

Miguel, this is excellent advice! As someone who's relatively new to cooperative tax issues, I really appreciate the suggestion about doing a three-year lookback analysis. That sounds like a smart way to build a compelling case for the change rather than just switching based on theory. Your point about increased IRS scrutiny is particularly helpful - I hadn't considered that they might request additional documentation in the first year. Do you have any recommendations for specific documents that should be readily available? Beyond the obvious ones you mentioned (governing documents, bylaws, proprietary leases), are there any particular board resolutions or operational records that the IRS typically looks for when verifying cooperative status? Also, regarding the timing consideration you mentioned - if a cooperative is planning major capital improvements, would it be better to make the form change before or after the improvements are completed? I'm wondering if there are any advantages to having the cooperative structure in place when financing or depreciating these improvements.