A Small Victory for Co-ops? Many Questions Still Remain in Light of Tax Court's Decision

To be, or not to be [taxed]?

That is the question.

It appears that William Shakespeare had been posing the same question that treasurers and other board members of New York co-ops have been asking their accountants for the past five years.

As corporations, residential co-ops are required to pay corporate income tax, making yearly filings on Internal Revenue Service Form 1120. Generally speaking, the income of a cooperative housing corporation includes the maintenance charges collected from shareholders, interest earned on reserve funds and escrow accounts, income from the laundry room and other commercial tenants, and so on. Of course, to the extent that any of the foregoing is tax exempt or characterized as a capital contribution (maintenance pay-ments used for capital improvements such as new windows, new boiler, new roof, etc.), it will not be deemed as income subject to taxation.

Just like any other corporate taxpayer, a cooperative housing corporation may deduct allowable expenses to offset its income, such as real estate taxes, interest expense on indebtedness, professional fees, management fees, insurance costs, payroll expenses, repairs, supplies, etc. In addition, a co-op may deduct depreciation on the building. Since maintenance fees are based on the annual cash needs of the building, most co-ops will end their year with no net income or a loss.

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