For Profit vs. Not For Profit

Our Florida HOA is a non profit corporation and files a 1120-H tax return.

Over the last 16 months, the board have created a scheme with a telecommunications contract where they negotiated a lower monthly cost, signed a 10 year contract (yes, 10 years) where $50,000.00 has been put into a separate account for a clubhouse expansion.

Did I mention, expansion scheme included no formal property owner vote?

Simple accounting would indicate under the 90% rule for HOA's that these excess funds, approximately $1.1MM today, are profits. They are not operating expenses, or identified reserve requirements.

Wouldn't these funds be tax as income?

Observations, or questions?

Is the money going into reserves?

I'm trying to understand this so please be patient with me. Club house expansion is not considered operating costs?

Correction - it should NOT be an operating expense.

It is a capital improvement or expenditure.

Carol - my mistake. You are correct.

Remind the Board about IRS Ruling 70-604 which should be complied with in case the HOA ever has to file form 1120 vs. 1120-H

For the 1120-H, At least 90% of the association's expenditures for the tax year must consist of expenses to acquire, build, manage, maintain, and care for property, and in the case of a timeshare association, for activities provided to, or on behalf of, members of the timeshare association. Include current and capital expenditures. Use the association's accounting method to figure the total.

Include:
1. Salary for an association manager or secretary.
2. Expenses for gardening, paving, street signs, security guards, and property taxes assessed on association property.
3. Current operating and capital expenditures for tennis courts, swimming pools, recreation halls, etc.
4. Replacement costs for common buildings, heating, air conditioning, elevators, etc.

Don’t include expenditures for property that is not association property. Also, don’t include investments or transfers of funds held to meet future costs. An example would be transfers to a sinking fund to replace a roof, even if the roof is association property.

See: IRS 1120-H instructions

John,

I don't believe I ever said contributions to the reserves wasn't allowed under form 1120-H.
I did say that if the Association ever had to file form 1120 vs. form 1120-H there would be issues.

See my earlier link to the IRS Revenue ruling.

John,

Translation - when figuring the 90% expenditure test, don't count the money that is transferred to the Reserves as an expense.

Example: In my association, we consider transfers to the reserves as an expense for budget purposes. We also donate money to the local fire department to escort Santa through the development. All other expenses are for running the Association or maintaining/repairing common area.

Therefore on the 1120-H, our 90% test would include the following:

Qualified expenses = total expenses - transfers to reserves - donation to FD
Total expenses = total expenses - transfers to reserves

Further questions about this should be directed to the IRS as they wrote the instructions.

So, you are saying that no more than 10% of budget may be for reserves ?

'My' association is playing 'catch-up' with about 24% of budget going into reserves with the blessing of our CPA who routinely files 1120(h)

? WTF ?

John,

It's apparent that you have never filed taxes for your Association.

If you are interested in learning how to file a 1120-H, please read the instructions previously linked to.
If you would like to see an example, ask your Association (as you stated your CPA is filing the 1120-H for them).

I read all the instructions very carefully.