Help with HOA 1120-H tax return

Probably best to ask a tax preparer who specializes in HOAs. Non-exempt income usually includes interest and dividends, rental income from property owned by the association, and laundry/vending machine income.

That $500 participation from your neighbor for the landscaping work might be entered in another way in your books.

PS Next year, see if the good Samaritan can send his check directly to the landscape company. Keep your HOA out of the loop.

It's other income, and you have a reasonable argument for allocating part of the landscaping expense against it to eliminate the tax. In theory the IRS could object to the deduction but in practice that won't happen in this lifetime.

Thank you all for your help.

It sounds like the $500 is not exempt-function income. That's kind of what I suspected after reading the 1120-H instructions. This is probably why the outgoing treasurer is avoiding my questions.

I'm still confused about "other income". A deduction "must be directly connected with the production of gross income". It sounds like ArtT5 and TimB4 both think a bill from the landscaper doesn't qualify. I'm not going to turn in a tax form that's iffy. I've got no experience with the 1120-H, but I'll not take the deduction unless it is common and not controversial.

Everyone agrees it's not a good idea to take a landscaping deduction against this voluntary, good-will $500 "donation"?

P.S. The HOA does not have an accountant, and I cannot get an appointment with an HOA specialist until after May 15th. I suppose I can wait until then, but I thought I'd get some feedback from you guys first.

HM,

You are correct, and as more clearly written by John (aka PITA), there would be no valid deduction unless it was non-Association land that was being maintained.

You received a good natured $500 gift. After taxes, that good natured gift is worth a little less then $380 (a little less because you will incur taxes on the interest income that may have been offset by the $100 deduction). It's still a gift and, since you can't count on it being there all the time, is above and beyond what you budgeted. Hence you are still on the positive side.

Art is offering another option of not paying taxes with the claim. This is similar, in my opinion, of your Treasurer simply not declaring the income. You can likely get away with it but it's not really allowed.

Do what you think is best as you are the one accountable for the filing.

If it makes a difference, I would claim the $500 as other income, pay the $120 taxes on it and be happy that the Association received a gift that provides funds you didn't plan on.

I was not suggesting that they claim an improper deduction. I was suggesting that they claim a deduction that seems reasonable and would likely be accepted by the IRS, while acknowledging that there's some chance the IRS would disagree. You can deduct expenses that are directly connected with the production of gross income. The expenditure on landscaping is directly connected with this item of gross income. If they didn't pay for the landscaping, they wouldn't get the $500. It isn't ironclad, but in the unlikely event this item is ever questioned, I think most IRS agents would accept that argument. You can pony up $120 in tax if the deduction makes you uncomfortable, but I don't see any good reason for such discomfort.

Line 7 description: received for maintaining landscaping
Line 15 description: landscaping cost allocated to line 7 income

Update: I had some time Saturday afternoon and talked to the old treasurer. There's some history.

10 years ago, he hired a CPA to do the taxes. The CPA put it below the line with just the $100 deduction. The CPA said the payment was not exempt-function income and you couldn't deduct landscaping from it. The CPA was an HOA specialist. That's how the return was filed that year.

But that pissed him off. He didn't want to pay taxes on it. The CPA told him for the future, just have the business write a check directly to the landscaping company. The treasurer was afraid that if he asked the business to do that, the business would just decide to quit sending the money.

So, since then, he's been doing the 1120-H himself with the payment included in exempt-function income. He knows this isn't right, but he says nobody cares, it's just a few hundred dollars.

Oh, and I was confused about the numbers. The $10,000 and $500 was quarterly. It's actually a $2000 "donation". The year he let the CPA do the taxes, it cost the HOA $667. He figures he's doing the HOA a huge favor, saving that much in taxes every year. He said if I wasn't comfortable with it, he'd find someone else to take over as treasurer who wasn't so picky.