If you're an association comparing Forms 1120 and 1120-H, at first glance it may seem you'll pay less by going with Form 1120. But be warned - there's much more to consider than just the amount you'll supposedly owe.
The most common IRS accusation in the case of an improperly filed Form 1120 is that you didn't follow proper procedures for making an election under Rev. Rul. 70-604. If that's the case, the revenue is disallowed, and all the revenue you expected to roll over to the next year gets taxed this year. By that point, it's too late to switch over to Form 1120-H.
Even worse, if you don't follow the strict procedural requirements of Code Section 118, a very large and potentially costly tax exposure risk exists. Or worse, the IRS could assert inappropriate tax accounting under Code Section 481, leading to disastrous results.
The biggest tax risk comes from not separating your non-reserve accounts from your capital reserve accounts. You'll have a hard time explaining to the IRS why you combined painting, contingency, and tree-trimming funds in with your capital reserves for roofing, fencing, and paving.
Because Form 1120 carries considerable risk, we recommend Form 1120-H for most associations.
