Assessment accounting question

TerriS6 (California)
Posts: 3,284

Posted:

Four years, the board invoiced illegally increased assessments. Half the members asked for refunds of the overages.

1. Are the assessments not refunded taxable income to the association?
2. Can the members who don't ask for a refund call it a charitable donation?
3. Can the association provide members in 2. a contribution letter for a receipt?

DouglasK1 (Florida)
Posts: 2,046

Posted:

Quote:

Posted By TerriS6 on 08/01/2023 6:51 AM
Four years, the board invoiced illegally increased assessments. Half the members asked for refunds of the overages.

1. Are the assessments not refunded taxable income to the association?
2. Can the members who don't ask for a refund call it a charitable donation?
3. Can the association provide members in 2. a contribution letter for a receipt?

Regarding #2, they can call it what they want, but it would not be tax deductible or exempt as your association is probably not a qualified charitable organization. See this IRS page for more details:
https://www.irs.gov/charities-non-profits/charitable-organizations/exemption-requirements-501c3-organizations

Escaped former treasurer and director of a self managed association.

SheliaH (Indiana)
Posts: 6,964

Posted:

Is that "the association did this over the last four years" or "the association has done this "for years?" How long is "for years?"

There could be tax implications to all this (the association as well as individual taxpayers), so you really should consult with a tax accountant (I trust that would be easier for you than contacting an attorney since you seem to think people make that recommendation too much?)

As a practical matter, what will this do to TODAY's budget if you issue these refunds - that money has to come from somewhere. Please don't suggest it come from reserves - you know or should know that's not what reserves are for, and in case you've forgotten how bad that can get when reserves are underfunded or abused, do a search on this website for older conversations and you'll see all sorts of stuff. If it comes from the operating budget, what happens to expenses for the rest of the year that must be paid in TODAY's money?

By the way, you never have explained these "illegal increased assessments" - what do your documents say about assessment increases and what exactly did the board do (or not) that was illegal?

You can't change history, so it might be best to hold assessments at the current rate for next year to give people a break from assessment increases. Of course, you'll still have 2024 prices to deal with, so you'd better think of a way to address that deficit (like reduce services - which ones and by how much?)

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By TerriS6 on 08/01/2023 6:51 AM
Four years, the board invoiced illegally increased assessments. Half the members asked for refunds of the overages.

1. Are the assessments not refunded taxable income to the association?

What federal tax form has the HOA been filing for the last several years? Form 1120-H? Or Form 1120?

The usual reason an owner is not permitted to take a tax deduction for his/her donation to a HOA is because Internal Revenue Code 528 (and not IRC 501) applies to the HOA. For a HOA to qualify as an IRC 501 "charitable organization" would be unusual. Under the tax code "charitable" is not interchangeable with "non-profit."

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By TerriS6 on 08/01/2023 6:51 AM
Four years, the board invoiced illegally increased assessments. Half the members asked for refunds of the overages.

1. Are the assessments not refunded taxable income to the association?

For owners who do not accept or ask for a refund, I expect the HOA could also lawfully credit these owners' accounts with advance payments, possibly mitigating any tax implications.

TerriS6 (California)
Posts: 3,284

Posted:

Quote:

Posted By SheliaH on 08/01/2023 7:15 AM
Is that "the association did this over the last four years" or "the association has done this "for years?" How long is "for years?"

There could be tax implications to all this (the association as well as individual taxpayers), so you really should consult with a tax accountant (I trust that would be easier for you than contacting an attorney since you seem to think people make that recommendation too much?)

As a practical matter, what will this do to TODAY's budget if you issue these refunds - that money has to come from somewhere. Please don't suggest it come from reserves - you know or should know that's not what reserves are for, and in case you've forgotten how bad that can get when reserves are underfunded or abused, do a search on this website for older conversations and you'll see all sorts of stuff. If it comes from the operating budget, what happens to expenses for the rest of the year that must be paid in TODAY's money?

By the way, you never have explained these "illegal increased assessments" - what do your documents say about assessment increases and what exactly did the board do (or not) that was illegal?

You can't change history, so it might be best to hold assessments at the current rate for next year to give people a break from assessment increases. Of course, you'll still have 2024 prices to deal with, so you'd better think of a way to address that deficit (like reduce services - which ones and by how much?)

It's a refund of an overpayment from being overcharged. The money comes from the member who overpaid.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

This sounds like an individual issue not a HOA one. The person overpaid gets extra back.

Former HOA President

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Quote:

Posted By TerriS6 on 08/01/2023 6:51 AM
Four years, the board invoiced illegally increased assessments. Half the members asked for refunds of the overages.

1. Are the assessments not refunded taxable income to the association?
2. Can the members who don't ask for a refund call it a charitable donation?
3. Can the association provide members in 2. a contribution letter for a receipt?

How did this "illegal" increased assessments happen?

TerriS6 (California)
Posts: 3,284

Posted:

Quote:

Posted By ElleN on 08/01/2023 7:43 AM

Posted By TerriS6 on 08/01/2023 6:51 AM
Four years, the board invoiced illegally increased assessments. Half the members asked for refunds of the overages.

1. Are the assessments not refunded taxable income to the association?

For owners who do not accept or ask for a refund, I expect the HOA could also lawfully credit these owners' accounts with advance payments, possibly mitigating any tax implications.

At the annual meeting, a few owners told the board they didn't need a refund. I guarantee it will not be applied to next year's assessments. It will be put in operating account or reserve account and spent.

SheliaH (Indiana)
Posts: 6,964

Posted:

Quote:

Posted By JohnC46 on 08/01/2023 10:01 AM

Posted By TerriS6 on 08/01/2023 6:51 AM
Four years, the board invoiced illegally increased assessments. Half the members asked for refunds of the overages.

1. Are the assessments not refunded taxable income to the association?
2. Can the members who don't ask for a refund call it a charitable donation?
3. Can the association provide members in 2. a contribution letter for a receipt?

How did this "illegal" increased assessments happen?

What John said (again). You still haven’t answered the question – if you were supposed to pay, say $100 a year or $100 a month, but paid $110 instead, how did that happen? Why is it so difficult for you to explain how this was illegal?

In some associations, the board can increase fees up to a certain percentage over the current year – anything higher has to be approved by homeowners (that’s how it works in my community) In others, a majority of homeowners have to approve the upcoming year’s budget with the increase in assessments. Some associations require the budget to be presented to the homeowners so they can answer questions, but the decision to change it and the proposed increase still rests with the board. What do YOUR documents say?

I understand an increase to be inappropriate at best if the documents said “do X before increasing assessments” but your board did Y instead, it was pointed out, but the homeowner (you?) were told to shaddup and pay. Is that what prompted a lawsuit or a threat of one? Did this “overcharge” happen to everyone or just a few people? How many and how much money are we talking about? All of this should be considered in addition to the tax stuff.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

TerriS6 (California)
Posts: 3,284

Posted:

Quote:

Posted By SheliaH on 08/01/2023 12:37 PM

Posted By JohnC46 on 08/01/2023 10:01 AM

Posted By TerriS6 on 08/01/2023 6:51 AM
Four years, the board invoiced illegally increased assessments. Half the members asked for refunds of the overages.

1. Are the assessments not refunded taxable income to the association?
2. Can the members who don't ask for a refund call it a charitable donation?
3. Can the association provide members in 2. a contribution letter for a receipt?

How did this "illegal" increased assessments happen?

What John said (again). You still haven’t answered the question – if you were supposed to pay, say $100 a year or $100 a month, but paid $110 instead, how did that happen? Why is it so difficult for you to explain how this was illegal?

In some associations, the board can increase fees up to a certain percentage over the current year – anything higher has to be approved by homeowners (that’s how it works in my community) In others, a majority of homeowners have to approve the upcoming year’s budget with the increase in assessments. Some associations require the budget to be presented to the homeowners so they can answer questions, but the decision to change it and the proposed increase still rests with the board. What do YOUR documents say?

I understand an increase to be inappropriate at best if the documents said “do X before increasing assessments” but your board did Y instead, it was pointed out, but the homeowner (you?) were told to shaddup and pay. Is that what prompted a lawsuit or a threat of one? Did this “overcharge” happen to everyone or just a few people? How many and how much money are we talking about? All of this should be considered in addition to the tax stuff.

Take your pick, no vote, no notice of increase, no budget, no annual budget report, no annual policy statement. Board increases of 20% which they did every year are not allowed unless all the conditions are met.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

In my association the BOD can raise dues as much as they want to but there is a procedure:
1. Can be done once a year.
2. Owners have to be notified via UPS on or before 12/01 showing the dues increase amount along with the
new budget to go into effect 01/01.
3. Owners could call a Special Meeting to reject the new budget and 51% of ALL OWNERS would have to vote to reject.
If rejected, the old budget stays in place with an automatic 5% dues increase.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Terri

It would help if you amplified your answers, and questions for the matter, a bit more.

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By TerriS6 on 08/01/2023 12:05 PM

Posted By ElleN on 08/01/2023 7:43 AM

Posted By TerriS6 on 08/01/2023 6:51 AM
Four years, the board invoiced illegally increased assessments. Half the members asked for refunds of the overages.

1. Are the assessments not refunded taxable income to the association?

For owners who do not accept or ask for a refund, I expect the HOA could also lawfully credit these owners' accounts with advance payments, possibly mitigating any tax implications.

At the annual meeting, a few owners told the board they didn't need a refund. I guarantee it will not be applied to next year's assessments. It will be put in operating account or reserve account and spent.

I think that's on the owners then, for not asking for either a refund or a credit to their accounts. If the HOA keeps the money, then the books have to reflect this income one way or another. It's either a donation and might be subject to taxation as 'taxable income.' Or it's an advance payment of dues (and duly credited to owners). An amendment of the prior years' tax returns might be necessary.

But I would not assume any refund an owner turned down is necessarily taxable.

I suppose the next question some might ask is: If owners turned down either a refund or a credit to their account, and so this money is now a donation to the HOA, and if this donation is taxable, who pays the taxes?

I expect all of the owners will pay it, on account of it being a mistake by the board, just like the HOA paid the various penalties you say the judge imposed.

TerriS6 (California)
Posts: 3,284

Posted:

Thanks, everyone.

TerriS6 (California)
Posts: 3,284

Posted:

Quote:

Posted By JohnC46 on 08/01/2023 1:13 PM
Terri

It would help if you amplified your answers, and questions for the matter, a bit more.

I will try.