taxable giifts

The CPA who figures our taxes told Our Vice President that gifts are considered taxable income. Many Board members have spend unreimbursed money for the Association. One Board member has spend over $1,000.00.

We are a non profit senior condo in NE.

Seems like I read on this forum one time that gifts or yard sale income needs to be over a certain percent of our annual income before it is taxable.

Looks like we might need to ask for receipts from everyone who has spend unreimbursed money. Some of our members also donate.

Bonnie,

Your CPA is right about gifts possibly being taxable income.

Remember that an HOA is able to treat most income in a special way. As long as the income (such as dues, fees, or assessments) is directly related to the function of the association, it is exempt from taxes.

Check out the IRS instructions for form 1120-H.

The large amount of donations started when a new owner moved in last summer. Our operating budget for this year is about $94,000.00. Next year it will be about $97,000.00.
I know of no paper trail at this time. Our Vice President was working with the CPA to get our current taxes paid. I don't know if the Vice President mentioned it, or if the CPA had questions.

The amount of gifts will more than likely amount to between $2,000.00 and $4,000.00.

While most HOA's are not a charitable 501(c) organization, its income is still exempt from taxation so long as the money comes from a member of the association and goes to the usual and ordinary expenses of a homeowners' association (upkeep, taxes, insurance, etc.) HOA income is treated very differently by the IRS than income of other corporations.

The donations and unreimbursed expenses that benefit your HOA can be treated as fees and be free from taxation, as long as it is used for exempt purposes.

Use this link to check out the IRS instructions for form 1120-H.

As a professional tax preparer, I couldn't help but notice some of the comments that have been made in this thread that are not entirely correct. Lets see if I can help clarify things:

1. Are "gifts" to the HOA taxable income? They could be. First, the IRS considers many things that individuals and organizations receive as taxable income: many things that most of us never bother to think about or report. For example, suppose your employer gives you a turkey for your Thanksgiving dinner. Is that taxable income? No. It is considered a "de minimus" gift and is not taxable. However, suppose instead your employer gives you a $25 gift card to use at your local supermarket. Is that taxable income? The IRS says it is. Even though it's about the same value as a turkey, the IRS considers it as income because it can be used the same as cash at the supermarket. What's worse, because it was given to you by your employer, it's considered part of your wages and is subject to FICA tax as well as income tax.

2. "If the income comes from the members of the HOA it is not taxable." That's not an entirely correct statement. Generally, that often turns out to be true, but what really matters is the nature of the income (not where it comes from) and whether or not the HOA even qualifies to file form 1120-H. To qualify to file form 1120-H an HOA must meet an income test and an expenditure test. Sixty percent of the HOA's income must be exempt function income. No more than forty percent can be non-exempt function income. Exempt function income is not taxable (provided the HOA qualifies to file form 1120-H) and is income from members in the form of regular assessments. Non-exempt function income (which is taxable) is any income that does not qualify as exempt function income. This includes income from outside sources (such as interest) and income from members that is for special use fees or something other than regular assessments. For example, a fee paid by a member to rent the clubhouse for private use would be considered non-exempt function income and is taxable, even though it comes from a member. Similarly, a "gift" or expense paid for by a member would be considered non-exempt function income and would be taxable (this is the position being taken by the CPA). Reading the instructions for form 1120-H does not give you the full detail. To learn more about the requirements for HOAs to qualify to use form 1120-H one must refer to 26CFR1.528.

3. "There's no paper trail." You can't guarantee that. What if the person providing the "gift" or paying for the HOA expense claims that amount on schedule A of his or her tax return as a charity deduction (which it is not) or as an employee business expense under miscellaneous deductions? There's your paper trail.

4. To think that some CPAs may be inclined to let a person "get away" with a little more that other CPAs when filing tax returns is bad thinking. All CPA's and all professional tax preparers must be registered with the IRS to be able to prepare tax returns for pay. Professional tax preparers who are not CPAs must, in addition, pass a competency examination required by the IRS. All professional preparers (including CPAs) are obligated to prepare returns that result in the (hopefully, lowest) tax that the taxpayer is legally obligated to pay. This means that the preparer cannot legally exclude income that the preparer knowingly must be reported. The IRS imposes penalties on preparers that knowingly fail to prepare legal returns. For example:

Understatement due to unreasonable positions. The penalty is the greater of $1,000 or 50% of the income derived by the tax return preparer with respect to the return or claim for refund.

Understatement due to willful or reckless conduct. The penalty is the greater of $5,000 or 50% of the income derived by the tax return preparer with respect to the return or claim for refund.

In addition, a preparer's or CPA's rights to practice before the IRS can be suspended or revoked, and a CPA's privilege to practice as a CPA can be suspended or revoked. This is in addition to any criminal penalties that could apply.

So, the CPA is only doing his job when he advises you that certain income is taxable. He can't legally advise you otherwise.

Bruce, thank you for your post. It fills in a number of details regarding HOAs and taxes.

There are only a few things that I would add. You are absolutely correct that section 528 of the tax code sets conditions that must be met in order for a homeowners' association to file a 1120-H form and have special treatment of income, including that 60% of income be exempt function income and 90% of expenditures be for ordinary maintenance activities. However, the vast majority of HOAs meet these conditions and are allowed to file this way.

The definition of "exempt function income" from treasury regulations section 1.528-9 is not definitive regarding whether a "gift" or unreimbursed expense paid for by a member qualifies as exempt function income for an HOA meeting the section 528 tests. The regulation says that "It is not necessary that the source of income be labeled as membership dues, fees, or assessments. What is important is that such income be derived from owners of residential units or residential lots in their capacity as owner-members rather than in some other capacity such as customers for services."

To resolve the question of whether a "gift" can be considered exempt from taxes, it may be instructional to apply the intention of the Tax Reform Act of 1976, which created section 528 of the tax code and the special treatment for HOAs. In that act congress decided not to tax revenues of an association of homeowners who act together as long as an individual homeowner acting alone would not be taxed on the same activity. So if a homeowner paid to fix up the clubhouse and declined reimbursement that act would not be taxable any more than the cost of fixing up one's own home would be taxable.

As Bruce points out, it is clear that income from outside sources (such as interest), income from members that is for special use, or a fee paid by a member to rent the clubhouse for private use does not qualify as "exempt function income".

Lawrence, thank you for providing additional information.

I think this is a good example to answer Jon's question. A CPA, unaware of the detail you provided, might be inclined to regard the HOA expenses paid for by a member as income, whereas another CPA armed with this insight, would not consider such a "donation" as income. Even if such a return is ultimately rejected by the IRS (the IRS is not necessarily consistent either, as opinions of tax examiners also vary) it is unlikely that the preparer would be penalized because the decision to prepare the return as he/she did is based on a reasonable position.

The tax code can get very complicated in certain situations.

Without a lot of details. I owned my own business and used to take a specific related deduction (about $15K per year) that my business CPA was all for. A good personal friend was a CPA and when the discussion of thes specific deduction came up he said he would not feel comfortable using it were he my CPA.

What was I to do.............LOL