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1120-H

Started by CjC • 10 replies • 1495 views

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CjC
Posts: 210
Posted:
We file an 1120-H as an HOA. I have a question about the 90% rule. Could we spend 100% of our budget to replace about 75 % of the personal mailboxes in the community? They are technically private property so I am not sure if that would disqualify us from the HOA definition if we spend so much for the private property especially if it isn't for everyone in the HOA. (Some members in a new section have cluster boxes instead of individual ones) Thanks.
SheliaH (Indiana)
Posts: 6,964
Posted:
You may want to consult your association attorney - sounds like a legal question to me.

If the mailboxes are technically private property, why do you want to spend HOA money to replace them?
If it is not right do not do it; if it is not true do not say it. Marcus Aurelius
NpS (Pennsylvania)
Posts: 4,216
Posted:
To file Form 1120-H, at least 60% of the HOA annual revenue must be “exempt-function income.” Exempt-function income includes membership dues, assessments, fees and interest on those fees. Also, 90% of the HOA’s expenditures must be for management, maintenance, acquisition and construction of association property.
If the HOA qualifies to file Form 1120-H, only its “non-exempt” income is taxable. Non-exempt income includes interest and dividends, rental income from property owned by the association, and laundry/vending machine income. The HOA is allowed to deduct expenses directly related to the generation of non-exempt income but must have written records to prove the deductions. Form 1120-H allows for a $100 deduction from non-exempt income to arrive at taxable income. The HOA’s taxable income is then subject to a flat tax rate of 30% (32% for time share associations)

Source: http://www.hbsbusiness.com/images/uploads/hbs/articles/Lets_Talk_Tax_-_24_Home_Owners_Associations.pdf

IMO, income spent on private mailboxes would be non-exempt.
Sikubali jukumu. Read all posts at your own risk.
NpS (Pennsylvania)
Posts: 4,216
Posted:
Different direction: Are your reserves 100% funded? If not, the excess funds could be set aside in reserves without taxation as non-exempt income. Speak to your tax specialist.
Sikubali jukumu. Read all posts at your own risk.
CjC
Posts: 210
Posted:
We have an odd situation that our HOA is now part of another HOA. We do not own any property anymore, but do collect dues in order to do landscaping and simple improvements around the neighborhood. We have a very large surplus account and some board members want to spend half of it, and this was their idea. Normally we spend about $25k a year, but this expense will be $75k plus. I am afraid since that is over 90% that it may have tax implications for us.
NpS (Pennsylvania)
Posts: 4,216
Posted:
Quote:
Posted By CjC on 02/05/2016 12:08 PM
We have an odd situation that our HOA is now part of another HOA. We do not own any property anymore, but do collect dues in order to do landscaping and simple improvements around the neighborhood. We have a very large surplus account and some board members want to spend half of it, and this was their idea. Normally we spend about $25k a year, but this expense will be $75k plus. I am afraid since that is over 90% that it may have tax implications for us.

So you have Association A that owns property and Association B that doesn't own property. My questions are about Association A.
1. Do you pay dues directly to Association A?
2. Does Association A have a Reserve account? What % funded is it?
Sikubali jukumu. Read all posts at your own risk.
JohnC46 (South Carolina)
Posts: 14,265
Posted:
Quote:
Posted By CjC on 02/05/2016 12:08 PM
We have an odd situation that our HOA is now part of another HOA. We do not own any property anymore, but do collect dues in order to do landscaping and simple improvements around the neighborhood. We have a very large surplus account and some board members want to spend half of it, and this was their idea. Normally we spend about $25k a year, but this expense will be $75k plus. I am afraid since that is over 90% that it may have tax implications for us.

What are the reserves for if you all own nothing?
ArtT5 (Illinois)
Posts: 84
Posted:
Good luck finding an association attorney, or a tax professional, who knows the answer to this question. The answer, I believe, depends on whether the mailboxes can be considered "association property" under a special definition that says privately owned property can be considered association property if certain tests are satisfied. If the mailboxes qualify as association property, the money you spend on them is "good" money for purposes of the 90% test. I'm guessing you're okay on this, but you should check subsection (c) of section 1.528-3 of the income tax regulations. I know the thought of reading income tax regulations horrifies many people, but I promise, this won't hurt a bit. Here's what it says:

(c) Privately owned property. Association property may also include property owned privately by members of the organization. However, to be so included the condition of such property must affect the overall appearance or structure of the residential units which make up the organization. Such property may include the exterior walls and roofs of privately owned residences as well as the lawn and shrubbery on privately owned land and any other privately owned property the appearance of which may directly affect the appearance of the entire organization. However, privately owned property will not be considered association property unless:

(1) There is a covenant or similar requirement relating to exterior appearance or maintenance that applies on the same basis to all such property (or to a reasonable classification of such property);

(2) There is a pro rata mandatory assessment (at least once a year) on all members of the association for maintaining such property; and

(3) Membership in the organization is a condition of ownership of such property.
NpS (Pennsylvania)
Posts: 4,216
Posted:
Quote:
Posted By ArtT5 on 02/06/2016 10:58 AM
(2) There is a pro rata mandatory assessment (at least once a year) on all members of the association for maintaining such property;

Mandatory pro rata annual assessment seems questionable.
Sikubali jukumu. Read all posts at your own risk.
ArtT5 (Illinois)
Posts: 84
Posted:
OP said they collect dues, but you're right, not clear this is a mandatory assessment, and that's why I posted the language of the reg.
NpS (Pennsylvania)
Posts: 4,216
Posted:
Quote:
Posted By ArtT5 on 02/06/2016 1:39 PM
OP said they collect dues, but you're right, not clear this is a mandatory assessment, and that's why I posted the language of the reg.

Key question: Is the HOA willing to assume long term responsibility for maintaining the mailboxes and then allocate the expense on a pro rata basis?
IMO, one time assumption of responsibility won't cut it.
Sikubali jukumu. Read all posts at your own risk.

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