$20K IRS payment - is this a 90% Expenditure

Started by MartinL3 • 9 replies • 240 views

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MartinL3 (California)
Posts: 3

Posted:

For the 2022 tax filing year the HOA paid $20K federal taxes related to 5 late un-filed years. Is this $20K IRS payment made in 2022 for tax years 2017-2021 considered a qualified 90% expenditure?

Martin

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By MartinL3 on 07/26/2023 7:25 PM
For the 2022 tax filing year the HOA paid $20K federal taxes related to 5 late un-filed years. Is this $20K IRS payment made in 2022 for tax years 2017-2021 considered a qualified 90% expenditure?

-- In my opinion the HOA's "income tax" is not an expense for the "acquisition, construction, management, maintenance, and care of the organization's association property" and so IMO it is not a qualifying expenditure for the purposes of the 90% expenditure test. See https://www.law.cornell.edu/cfr/text/26/1.528-6 and https://www.irs.gov/instructions/i1120h .
In my opinion "income tax" in and of itself is not a direct expense for caring for the HOA property.

-- Note also that for at least Form 1120-H, the income tax for 2017-2021 is income tax paid on non-exempt income, including for example interest the HOA earned. Hence the income tax related solely to non-exempt functions. This relationship also argues for income tax not being a qualifying expenditure.

-- Notice how real estate taxes are listed as being a qualifying expenditure. If "income tax" were a "qualifying expenditure," I would expect it would have been listed.

-- Chatter by professionals appears at https://www.hoaleader.com/public/560.cfm. See also page 4 of https://www.ficpa.org/Content/Files/Docs/CPE/CourseManuals/2010/CIRA/2010BayberyHandoutUpdate.pdf

-- The members of HOATalk are nearly all "mere" owners at HOAs and current and former volunteer directors on HOA boards. For a volunteer to make this call (about whether "income tax" in and of itself is a "qualifying expenditure" for Form 1120-H 90% purposes) would be highly unusual. Consider asking this question at an accounting forum.

BillH10 (Texas)
Posts: 1,217

Posted:

Martin

While I agree with ElleN, I recommend you consult with a CPA who specializes in HOA tax matters if you have not done so already. While I am not a tax expert, and did not sleep in a Holiday Inn Express last night, you need to get this straight before more damage is done.

What is your association doing to have @$5,000 annually in non-exempt income? Examples would include renting out the clubhouse or interest on bank accounts?

MelissaP1 (Alabama)
Posts: 13,836

Posted:

It sounds like your HOA has a systematic problem if your having this issue. Can understand one or two years but 5? Something seems off here. Do you have a professional accountant? Is your HOA a not-profit or for-profit? Is this tax penalties or payments? Need a little bit more details.

Former HOA President

MarkS42 (North Carolina)
Posts: 70

Posted:

Qualifying expenditures are expenditures by an organization for the acquisition, construction, management, maintenance, and care of the organization's association property. They include both current operating and capital expenditures on association property.

Preparing taxes and paying income taxes is one of the tasks necessary for the management of the HOA property. If you do not pay your taxes you can lose your property so I say it would count as a qualifying expense.

MartinL3 (California)
Posts: 3

Posted:

I am a CPA, specializing in tax work and do a limited number of HOA's. I did my own research and concluded the same as ElleN. The HOA had not filed the previous years 5 years taxes and rented out land for cattle grazing. So, that's how the taxable income was generated for 5 years. For 2022 they have stopped renting out the land for grazing. Client was hoping they could file 2022 as a 1120-H. But, they will need to file 1120 and CA 100 as a corporation because of the $20K paid to IRS results in failing to meet the 90% expediture test.

Thank you for your comments and feedback.
Martin

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Martin, which tax form did the HOA file (granted, late) for each year from 2017-2021: 1120-H or 1120?

MartinL3 (California)
Posts: 3

Posted:

2017-2019 filed was 1120. 2020 and 2021 1120-H.
Martin

ElleN (Idaho)
Posts: 4,420

Posted:

I asked about which tax form your HOA used for each year because I thought maybe breaking down the $20k income tax into the categories of (1) tax on exempt function income; and (2) tax on non-exempt function income might be something to ponder. But because of the following, I do not think it's worth it.

The IRS is clear that federal income taxes cannot be counted as a deductible business expense under any circumstances. See for example https://www.irs.gov/publications/p535#en_US_2022_publink1000208824. See also https://turbotax.intuit.com/tax-tips/small-business-taxes/taking-business-tax-deductions/L5RueYPVS. If a HOA counts the federal income taxes as part of the HOA's exempt function expenses (for purposes of the 90% rule and potentially filing 1120-H), then it appears to me that this is effectively going to end up treating at least a part of the $20k (= the HOA's payment of federal income taxes) as a business deduction. I say, either "Foul" or at least "very smelly."

Your HOA is somewhat on the IRS's radar, both because of the recent delinquency and because it has filed Form 1120 in recent years. Also the cost of an accountant figuring this out might start to exceed the cost of just filing Form 1120 (and not 1120-H) and paying the income taxes, without taking the $20k as a business deduction or business expense in any way.

The net has many business tax forums. I would take this question there. The participants might very well be able to resolve this in short order.

ElleN (Idaho)
Posts: 4,420

Posted:

Martin, I hope you are aware of this: https://www.davis-stirling.com/HOME/E/Excess-Income-Resolution

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