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Settlement Money for HOA

Started by JoanaV • 24 replies • 3340 views

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JoanaV (Montana)
Posts: 2
Posted:
Our HOA recently received a large sum of money from an adjacent developer for a fire egress easement through our development. Are we required to pay taxes on this income? Is there a way for the HOA to hold the money for future expenses?
JohnK3 (Pennsylvania)
Posts: 967
Posted:
Joana,

Check with your accountant.

But if you file an 1120-H form, I'd guess it's a taxable event as Line 7 Other Income.

Put it in the bank for now. Your docs probably give the BOD the call on how it is spent.
SusanW1 (Michigan)
Posts: 5,202
Posted:
It sure is Misc. Income and will be taxable.
JoanaV (Montana)
Posts: 2
Posted:
If the Homeowners each take an equal portion of the egress sale money from their individual cost basis, do you think we can hold the money in a reserve fund? Essentially it would be a contribution by each owner for the reserve fund and does not seem like it would be taxable to the association.

The individual lot owners would then pay capital gains, if any,at the time they sold their property. Essentailly it would be a contribution from each owner to the reserve fund for future expenditures.

Any thoughts on this?
SusanW1 (Michigan)
Posts: 5,202
Posted:
You said that the HOA had already received this settlement. The corporation was one of the parties of the lawsuit. So the corporation received the funds. It has to run thru the books of the HOA, not individual homeowners.

SusanW1 (Michigan)
Posts: 5,202
Posted:
Sorry - I thought this was a lawsuit settlement award.

In any case, the corporation received the monies and will have to claim it as Misc. Income. But check with a CPA and let us know.
KirkW1 (Texas)
Posts: 1,665
Posted:
I would not recommend looking for creative methods for getting out of paying taxes. First, consider what the return is versus the expense if you are held liable for fraud. Then also consider if you really want to drag the neighborhood through an investigation.
MaryA1 (Arizona)
Posts: 7,043
Posted:
Joana,

As others have said, this is a matter for a CPA to handle. He will know what type income it is and whether or not it's taxable. If it's put into the reserve account it may or may not be taxable. Depending upon how the assn is set up, the h/o's may not be legally allowed to receive the proceeds. A CPA will know all the IRS rules -- let him advise you accordingly.
SusannaM (Florida)
Posts: 366
Posted:
I'd to clarify that technically speaking a CPA is an auditor. A lot of CPAs know very little about taxes and tax returns. An enrolled agent or accountant can explain IRS rules bases on his/her experience.
GeorgerwilliamsW (Indiana)
Posts: 975
Posted:
Quote:
Posted By SusannaM on 11/07/2008 9:59 AM
I'd to clarify that technically speaking a CPA is an auditor. A lot of CPAs know very little about taxes and tax returns. An enrolled agent or accountant can explain IRS rules bases on his/her experience.
No, even that is not correct. A CPA is a certified public accountant. An auditor is an auditor. A CPA does not have to be an auditor, and an auditor does not have to be a CPA.
SusannaM (Florida)
Posts: 366
Posted:
George, you are "technically" correct. Let me put it this way, the OP or her HOA does not need to pay a CPA to find out the ins and outs of a 1120-H. Here in FL the Treasurer of a HOA can prepare and sign an 1120-H. You can research the IRS site (irs.gov) if you know what you are looking for.
JohnK3 (Pennsylvania)
Posts: 967
Posted:
Susanna,

LOL! The IRS lists the approx. time for completion of 1120-H as 20.5 HOURS. I'm not a CPA, auditor, nor have any other special skills as to taxes, but I knocked off our 2007 report in less than 20 minutes.

So easy, a cave...a cave...a volunteer HOA Treasurer could do it!
SusannaM (Florida)
Posts: 366
Posted:
JohnK, good for you !!!! LOL
MaryA1 (Arizona)
Posts: 7,043
Posted:
Quote:
Posted By GeorgerwilliamsW on 11/07/2008 10:07 AM
Posted By SusannaM on 11/07/2008 9:59 AM
I'd to clarify that technically speaking a CPA is an auditor. A lot of CPAs know very little about taxes and tax returns. An enrolled agent or accountant can explain IRS rules bases on his/her experience.
No, even that is not correct. A CPA is a certified public accountant. An auditor is an auditor. A CPA does not have to be an auditor, and an auditor does not have to be a CPA.

George,

Correction! According to info I have from the AICPA, an audit MUST be performed by a licensed, independent CPA knowledgeable in all areas of GAAP. Of course this applies to auditing financial records, which is what I think the topic here is.

MaryA1 (Arizona)
Posts: 7,043
Posted:
Quote:
Posted By SusannaM on 11/07/2008 9:59 AM
I'd to clarify that technically speaking a CPA is an auditor. A lot of CPAs know very little about taxes and tax returns. An enrolled agent or accountant can explain IRS rules bases on his/her experience.

Susanna,

I must say your a grossly misinformed about CPAs and what they do. Who do you think prepares the bulk of tax returns each year, especially those of businesses and large corps? I don't know what CPAs you've had experience with that didn't know very much about taxes and tax returns but I'd recommend you not partake of their services any longer!
MaryA1 (Arizona)
Posts: 7,043
Posted:
Quote:
Posted By SusannaM on 11/07/2008 10:30 AM
George, you are "technically" correct. Let me put it this way, the OP or her HOA does not need to pay a CPA to find out the ins and outs of a 1120-H. Here in FL the Treasurer of a HOA can prepare and sign an 1120-H. You can research the IRS site (irs.gov) if you know what you are looking for.

Susanna,

First of all, even though the treasurer might prepare the tax return it should really be signed by the Pres of the HOA. The treasurer cannot sign the return as the preparer if she/he is not being paid to prepare the return. Secondly, of course anyone can prepare the return, but it would be wise to have a CPA do this to ensure it is being prepared properly and all the tax benefits available are being passed on to the assn. It would be very difficult for a novice to know what all the tax laws are regarding HOAs -- even by researching the IRS website.
MaryA1 (Arizona)
Posts: 7,043
Posted:
Quote:
Posted By SusannaM on 11/07/2008 10:30 AM
George, you are "technically" correct. Let me put it this way, the OP or her HOA does not need to pay a CPA to find out the ins and outs of a 1120-H. Here in FL the Treasurer of a HOA can prepare and sign an 1120-H. You can research the IRS site (irs.gov) if you know what you are looking for.

Susanna,

First of all, even though the treasurer might prepare the tax return it should really be signed by the Pres of the HOA. The treasurer cannot sign the return as the preparer if she/he is not being paid to prepare the return. Secondly, of course anyone can prepare the return, but it would be wise to have a CPA do this to ensure it is being prepared properly and all the tax benefits available are being passed on to the assn. It would be very difficult for a novice to know what all the tax laws are regarding HOAs -- even by researching the IRS website.
MaryA1 (Arizona)
Posts: 7,043
Posted:
Quote:
Posted By JohnK3 on 11/07/2008 10:40 AM
Susanna,

LOL! The IRS lists the approx. time for completion of 1120-H as 20.5 HOURS. I'm not a CPA, auditor, nor have any other special skills as to taxes, but I knocked off our 2007 report in less than 20 minutes.

So easy, a cave...a cave...a volunteer HOA Treasurer could do it!

John,

Since your assn is so small, preparing the tax return is not really a big deal. I could have done the same when I was treasurer of my former assn, however, I decided to have a CPA do the work. I didn't feel I wanted the resp. on my shoulders even though I had worked as an accountant in a CPA firm and had prepared thousands of corp tax returns.
SusannaM (Florida)
Posts: 366
Posted:


Susanna,

I must say your a grossly misinformed about CPAs and what they do. Who do you think prepares the bulk of tax returns each year, especially those of businesses and large corps? I don't know what CPAs you've had experience with that didn't know very much about taxes and tax returns but I'd recommend you not partake of their services any longer!

Mary1, I beg your pardon.....I'm NOT grossly misinformed. Perhaps you have developed a "cult" for CPAs from obeying to their orders in return for a paycheck. I respect your opinion and valuable information on this forum but I have my own ideas here in Florida.
GeorgerwilliamsW (Indiana)
Posts: 975
Posted:
Quote:
Posted By MaryA1 on 11/07/2008 12:08 PM
Susanna,

First of all, even though the treasurer might prepare the tax return it should really be signed by the Pres of the HOA. The treasurer cannot sign the return as the preparer if she/he is not being paid to prepare the return. Secondly, of course anyone can prepare the return, but it would be wise to have a CPA do this to ensure it is being prepared properly and all the tax benefits available are being passed on to the assn. It would be very difficult for a novice to know what all the tax laws are regarding HOAs -- even by researching the IRS website.
Mary, where do you get your information. This is utterly wrong. The treasurer can both prepare and sign the return. I challenge you to cite the IRS rule, regulation or even instruction that says a treasurer cannot both prepare and sign the return. Indeed, the IRS only requires that the return be signed by an authorized officer of the corporation.

I also want to challenge you on this notion of a CPA. There are many, many highly qualified tax experts in the world who are not CPAs. Indeed, my partner has a degree in tax law, and probably knows more about corporate tax issues than any CPA who would be preparing a homeowners association tax return.

An 1120-H is not a difficult form to complete for a reasonably intelligent person, even a novice. (Now if you are a (c)(4) organization a 990 is a different story altogether.) The tax laws regarding a homeowners association are incredibly straight forward. It only becomes somewhat more challenging if the association chooses to be taxed as a C corporation (form 1120) rather than a homeowners association.
DwightT (Idaho)
Posts: 664
Posted:
Quote:
Posted By GeorgerwilliamsW on 11/07/2008 1:21 PM
Mary, where do you get your information. This is utterly wrong. The treasurer can both prepare and sign the return. I challenge you to cite the IRS rule, regulation or even instruction that says a treasurer cannot both prepare and sign the return. Indeed, the IRS only requires that the return be signed by an authorized officer of the corporation.

I'll agree that Mary has probably overstated the requirement, but this is from our Bylaws under "Duties of Officers":

President- The President shall preside at all meetings of the Board; shall see that orders and resolutions of the Board are carried out; shall sign all leases, mortgages, deed, and other written instruments and shall have the right to sign checks and promissory notes.


So while the IRS may not require that the return be signed by the President, our Bylaws do.
GeorgerwilliamsW (Indiana)
Posts: 975
Posted:
No problem with that, Dwight. It is a self-imposed fiduciary control, entirely reasonable. It is the unsupported blanket statements without any cited documentation or authority that is the issue.
MaryA1 (Arizona)
Posts: 7,043
Posted:
Quote:
Posted By GeorgerwilliamsW on 11/07/2008 1:21 PM
Posted By MaryA1 on 11/07/2008 12:08 PM
Susanna,

First of all, even though the treasurer might prepare the tax return it should really be signed by the Pres of the HOA. The treasurer cannot sign the return as the preparer if she/he is not being paid to prepare the return. Secondly, of course anyone can prepare the return, but it would be wise to have a CPA do this to ensure it is being prepared properly and all the tax benefits available are being passed on to the assn. It would be very difficult for a novice to know what all the tax laws are regarding HOAs -- even by researching the IRS website.
Mary, where do you get your information. This is utterly wrong. The treasurer can both prepare and sign the return. I challenge you to cite the IRS rule, regulation or even instruction that says a treasurer cannot both prepare and sign the return. Indeed, the IRS only requires that the return be signed by an authorized officer of the corporation.

I also want to challenge you on this notion of a CPA. There are many, many highly qualified tax experts in the world who are not CPAs. Indeed, my partner has a degree in tax law, and probably knows more about corporate tax issues than any CPA who would be preparing a homeowners association tax return.

An 1120-H is not a difficult form to complete for a reasonably intelligent person, even a novice. (Now if you are a (c)(4) organization a 990 is a different story altogether.) The tax laws regarding a homeowners association are incredibly straight forward. It only becomes somewhat more challenging if the association chooses to be taxed as a C corporation (form 1120) rather than a homeowners association.

George,

I did not say the treasurer couldn't prepare the tax return only that it was wise to have a CPA do it. I don't doubt your partner is capable of preparing a tax return but he isn't a member of this assn, is he? In this instance we're talking about the OP's assn.

Most assn docs state one of the Pres' duties is to sign all official papers of the assn. and that's why I stated the Pres should sign the return. Note I said it "should" be, not that it "must" be.

BTW, do you know what a "c corp is"? I think not! It's certainly not an hoa. It is in fact a crop that has not elected S corp status.

In your response to Dwight, you said: "It is the unsupported blanket statements without any cited documentaton or authority that is the issue." You also said earlier that an auditor does not need to be a CPA which is totally wrong. AICPA does require all financial audits to be performed by a licensed CPA. Perhaps you should practice what you preach, George.

MaryA1 (Arizona)
Posts: 7,043
Posted:
Quote:
Posted By SusannaM on 11/07/2008 12:44 PM

Susanna,

I must say your a grossly misinformed about CPAs and what they do. Who do you think prepares the bulk of tax returns each year, especially those of businesses and large corps? I don't know what CPAs you've had experience with that didn't know very much about taxes and tax returns but I'd recommend you not partake of their services any longer!


Mary1, I beg your pardon.....I'm NOT grossly misinformed. Perhaps you have developed a "cult" for CPAs from obeying to their orders in return for a paycheck. I respect your opinion and valuable information on this forum but I have my own ideas here in Florida.

Susanna,

Wow! What nerve to allude that I've been paidoff by CPAs! I'll repeat, you are grossly misinformed if you do really believe CPAs ". . .know very little about taxes and tax returns". You may have your own ideas, but they are very wrong!
SusannaM (Florida)
Posts: 366
Posted:
Mary1, got news for you!!!!! I am a bookkeeper and tax preparer registered with the IRS. I also know a few CPAs in FL, GA, and OH. I do NOT appreciate your preaching on this forum, and the moderator should give you a warning, which is customary in most forums.

You are correct in that all corps are essentially C corps until they elect the S status. According to the IRS, a homeowners association should compare its total tax computed on Form 1120-H with its total tax computed on Form 1120. The association may file the form that offers less tax liability. Again, not all HOAs are the same.

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