Fed Income Tax on non-profit Homeowners Association

Discussion in 'Tax' started by Bill, Mar 27, 2006.

  1. Bill

    Bill Guest

    The community in which I live is governed by a Homeowners
    Assn, which is registered as a Florida non-profit
    organization.

    Issue has arisen regarding taxes which might be due on
    "Reserve Funds." Since the Assn owns the paved roads, plus
    retention ponds, there is a need for building up
    considerable reserves in order to fund periodic maintenance,
    and occasional major resurfacing (roads) or
    re-engineering/rebuilding of ponds.

    Past Board policy has avoided building reserves -- because
    of the belief that they would have to pay taxes on them.

    Does anyone know what FIT law is in this area? Since we're
    talking upwards of $500,000 potential obligation for the two
    projects, the annual tax "cost" would be significant --
    probably larger than the total budget for normal yearly
    expenses, so this has deterred Board from building reserves.

    Since the ByLaws also _require_ the Board to maintain these
    facilities, there is clearly a Catch-22, if FIT is due on
    the reserve funds or interest earned as they accrue in
    preparation for meeting the obligation to rebuild and
    maintain.

    Does anyone have an answer to this? A cite would also be
    appreciated.

    Bill

    << ======================================================= >>
    << The foregoing is intended for educational purposes only >>
    << and does NOT constitute legal OR professional advice. >>
    << >>
    << The Charter and the Guidelines for submitting >>
    << messages to this newsgroup are at www.asktax.org. >>
    << Copyright (2006) - All rights reserved. >>
    << ======================================================= >>
     
    Bill, Mar 27, 2006
    #1
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  2. Bill

    Dick Adams Guest

    Bill wrote:

    > The community in which I live is governed by a Homeowners
    > Assn, which is registered as a Florida non-profit
    > organization.
    >
    > Issue has arisen regarding taxes which might be due on
    > "Reserve Funds." Since the Assn owns the paved roads, plus
    > retention ponds, there is a need for building up
    > considerable reserves in order to fund periodic maintenance,
    > and occasional major resurfacing (roads) or
    > re-engineering/rebuilding of ponds.
    >
    > Past Board policy has avoided building reserves -- because
    > of the belief that they would have to pay taxes on them.
    >
    > Does anyone know what FIT law is in this area? Since we're
    > talking upwards of $500,000 potential obligation for the two
    > projects, the annual tax "cost" would be significant --
    > probably larger than the total budget for normal yearly
    > expenses, so this has deterred Board from building reserves.


    I have not researched this at all, i.e., my comments are
    based on my interpretation of common sense.

    Any homeowner can set aside funds for maintenance. Since
    these funds are post-tax dollars, they are only subject to
    taxation on the interest. The same should be true for an HA
    as long as they are post-tax dollars. There might be a
    glitch for commercial owners, but the bookkeeping problem for
    that belongs to the commercial owner and not to the HA.

    Now $500,000 is not chum change even if it is divided 100
    ways. As a matter of fact, the more ways you divide it up,
    the more effort and the more expense are involved in
    collecting it on a timely basis. I served on the board of
    an HA and the biggest problem we had was arrearages.

    In my rarely humble opinion, your HA would be well-advised
    to retain a Certified Public Accountant, an Enrolled Agent,
    or a tax attorney who has several HA clients. I suspect the
    State of Florida maintins a list of HA's and it would be a
    clerical task to contact those in your area and inquire as
    to from whom they get their tax advice. You are dealling
    with big bucks so make certain you are hiring someone with
    documentable expertise.

    Dick

    << ======================================================= >>
    << The foregoing is intended for educational purposes only >>
    << and does NOT constitute legal OR professional advice. >>
    << >>
    << The Charter and the Guidelines for submitting >>
    << messages to this newsgroup are at www.asktax.org. >>
    << Copyright (2006) - All rights reserved. >>
    << ======================================================= >>
     
    Dick Adams, Mar 29, 2006
    #2
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  3. Bill

    Guest

    Bill wrote:

    > The community in which I live is governed by a Homeowners
    > Assn, which is registered as a Florida non-profit
    > organization.
    >
    > Issue has arisen regarding taxes which might be due on
    > "Reserve Funds." Since the Assn owns the paved roads, plus
    > retention ponds, there is a need for building up
    > considerable reserves in order to fund periodic maintenance,
    > and occasional major resurfacing (roads) or
    > re-engineering/rebuilding of ponds.
    >
    > Past Board policy has avoided building reserves -- because
    > of the belief that they would have to pay taxes on them.
    >
    > Does anyone know what FIT law is in this area? Since we're
    > talking upwards of $500,000 potential obligation for the two
    > projects, the annual tax "cost" would be significant --
    > probably larger than the total budget for normal yearly
    > expenses, so this has deterred Board from building reserves.


    Note that non-profit (a particular type of corporation under
    state corporate law) is not the same as tax exempt (which
    can be bestowed only by Congress or the IRS). In the case
    of a homeowners association, the Internal Revenue Code
    provides that a qualifying corporation can elect each year
    to be treated as either taxable or tax exempt. If the
    association elects to be taxable it must file Form 1120, if
    it elects to be tax-exempt it must file Form 1120-H. (In
    Congress's strange way of doing things, tax-exempt for a
    homeowners association is not 100% tax exempt, see below).

    In order to be allowed to elect tax exempt status, the
    homeowners association must meet two tests, the source of
    income test, and the expenditure test. Under the source of
    income test, at least 60% of the income for the association
    for the year must come from owner dues, fees, or
    assessments. Under the expenditure test, at least 90% of
    the expenditures for the year must be for the acquisition,
    construction, management, maintenance and care of
    association property. (This provision does not require you
    to spend 90% of your income each year, just that 90% of
    whatever you do spend must be spent for association
    purposes).

    If a homeowners association qualifies to be tax exempt and
    files Form 1120-H to make the election to be exempt for that
    year, then the member dues, fees and assessments will all be
    tax exempt income to the association as long as the dues fee
    and assessments are not paid by the members in the capacity
    of customers for services. Dues paid based on the value or
    size of a member's property would be exempt income.
    Incremental dues or fees based on the usage of a facility
    would not be tax exempt.

    Also treated as taxable income are interest, dividends, and
    capital gains. The taxable income of an electing homeowners
    association is taxed at a flat 30% rate.

    So, you should be able to build up the reserves that you are
    looking for without incurring any tax on the amounts paid
    into the association. The association will have to pay tax
    on the investment income earned by the reserves, if any.

    --Chris Ballard

    << ======================================================= >>
    << The foregoing is intended for educational purposes only >>
    << and does NOT constitute legal OR professional advice. >>
    << >>
    << The Charter and the Guidelines for submitting >>
    << messages to this newsgroup are at www.asktax.org. >>
    << Copyright (2006) - All rights reserved. >>
    << ======================================================= >>
     
    , Mar 29, 2006
    #3
  4. "Bill" <> wrote:

    > The community in which I live is governed by a Homeowners
    > Assn, which is registered as a Florida non-profit
    > organization.
    >
    > Issue has arisen regarding taxes which might be due on
    > "Reserve Funds." Since the Assn owns the paved roads, plus
    > retention ponds, there is a need for building up
    > considerable reserves in order to fund periodic maintenance,
    > and occasional major resurfacing (roads) or
    > re-engineering/rebuilding of ponds.
    >
    > Past Board policy has avoided building reserves -- because
    > of the belief that they would have to pay taxes on them.
    >
    > Does anyone know what FIT law is in this area? Since we're
    > talking upwards of $500,000 potential obligation for the two
    > projects, the annual tax "cost" would be significant --
    > probably larger than the total budget for normal yearly
    > expenses, so this has deterred Board from building reserves.
    >
    > Since the ByLaws also _require_ the Board to maintain these
    > facilities, there is clearly a Catch-22, if FIT is due on
    > the reserve funds or interest earned as they accrue in
    > preparation for meeting the obligation to rebuild and
    > maintain.
    >
    > Does anyone have an answer to this? A cite would also be
    > appreciated.


    Generally, the HOA must put it to the owners to vote on the
    disposition of excess funds. The choices are 1) retain in
    the HOA for future use and property improvements or 2)
    return to the homeowners. If the owners vote to retain the
    funds inside the association, then the HOA *may* be taxable
    on the interest or other earnings of the reserves but is not
    taxable on the build-up of the reserves in spite of the fact
    that that build-up represents an excess of HOA revenues over
    expenditures. HOA's are somewhat specialized entities and I
    do not have any clients that are HOA's. This is a very
    general discussion of the treatment of excess funds within
    an HOA, I will certainly defer to others that chime in w/
    more specific information.

    << ======================================================= >>
    << The foregoing is intended for educational purposes only >>
    << and does NOT constitute legal OR professional advice. >>
    << >>
    << The Charter and the Guidelines for submitting >>
    << messages to this newsgroup are at www.asktax.org. >>
    << Copyright (2006) - All rights reserved. >>
    << ======================================================= >>
     
    San Diego CPA, Mar 29, 2006
    #4
  5. "Bill" <> wrote

    > The community in which I live is governed by a Homeowners
    > Assn, which is registered as a Florida non-profit
    > organization.
    >
    > Issue has arisen regarding taxes which might be due on
    > "Reserve Funds." Since the Assn owns the paved roads, plus
    > retention ponds, there is a need for building up
    > considerable reserves in order to fund periodic maintenance,
    > and occasional major resurfacing (roads) or
    > re-engineering/rebuilding of ponds.
    >
    > Past Board policy has avoided building reserves -- because
    > of the belief that they would have to pay taxes on them.
    >
    > Does anyone know what FIT law is in this area? Since we're
    > talking upwards of $500,000 potential obligation for the two
    > projects, the annual tax "cost" would be significant --
    > probably larger than the total budget for normal yearly
    > expenses, so this has deterred Board from building reserves.


    The homeowner dues are not income to the Association, and
    therefore the accumulation of funds are not a taxable event.

    Now, the interest earned on that money, if it is so invested
    in like CD's, would be taxable income to the Association.

    Take a look at the 1120-H. That's maybe the best way to go,
    or you can elect to use the straight corporate form.

    http://www.irs.gov/pub/irs-pdf/f1120h.pdf

    The question does come to mind though, what have you been
    doing all these years?

    --
    Paul Thomas, CPA


    << ======================================================= >>
    << The foregoing is intended for educational purposes only >>
    << and does NOT constitute legal OR professional advice. >>
    << >>
    << The Charter and the Guidelines for submitting >>
    << messages to this newsgroup are at www.asktax.org. >>
    << Copyright (2006) - All rights reserved. >>
    << ======================================================= >>
     
    Paul Thomas, CPA, Jun 2, 2006
    #5
  6. Bill

    Bill Guest

    (Paul Thomas, CPA) posted:
    > "Bill" <> wrote:


    >> The community in which I live is governed by a
    >> Homeowners Assn, which is registered as a Florida
    >> non-profit organization.
    >> [elided for brevity]
    >> Issue has arisen regarding taxes. Past Board policy has
    >> avoided building reserves -- because of the belief that
    >> they would have to pay taxes on them.
    >> Does anyone know what FIT law is in this area?


    > The homeowner dues are not income to the Association, and
    > therefore the accumulation of funds are not a taxable event.
    > Now, the interest earned on that money, if it is so invested
    > in like CD's, would be taxable income to the Association.
    > [Again, elided for brevity.]
    > The question does come to mind though, what have you been
    > doing all these years?


    To answer your question:
    The "old" board wasn't accruing any significant reserves. A
    new president was recently elected and in seeking to revise
    this stupid policy, sought my aid in convincing "old"
    carryover members of their error.

    Problem has been resolved, as several carryover members
    resigned, and previous posters provided info similar to
    yours -- so now the remaining problem is the need for
    "special assessments" to cover for past errors.

    Bill

    << ======================================================= >>
    << The foregoing is intended for educational purposes only >>
    << and does NOT constitute legal OR professional advice. >>
    << >>
    << The Charter and the Guidelines for submitting >>
    << messages to this newsgroup are at www.asktax.org. >>
    << Copyright (2006) - All rights reserved. >>
    << ======================================================= >>
     
    Bill, Jun 3, 2006
    #6
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