LauraD (Arizona)
Posts: 18
Posts: 18
Posted:
Is there a AZ tax guru out there who can tell me how much can be carrried over in a budget for a HOA who has 401C status
without incurring a tax?
without incurring a tax?
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Taxes & 401C status
Started by LauraD • 13 replies • 3548 views
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LauraD (Arizona)
Posts: 18
Posts: 18
Posted:
Excuse me --- it is 501C status.
I dropped 100!!
I dropped 100!!
MaryA1 (Arizona)
Posts: 7,043
Posts: 7,043
Posted:
Laura,
Which 501(c) designation? There are quite a few -- (3), (4), (7), etc., etc.
Which 501(c) designation? There are quite a few -- (3), (4), (7), etc., etc.
LauraD (Arizona)
Posts: 18
Posts: 18
Posted:
501C(4)
MaryA1 (Arizona)
Posts: 7,043
Posts: 7,043
Posted:
Laura,
I cannot understand why you are asking this question. What does carrying over a net profit to the following year have to do with incurring a tax liability?
Frankly I'm wondering why you are doing this. IMO, the budget should only show anticipated income and expenses. Any net profit realized in the past year should not be used to defray the income or expenses anticipated in the coming year. That net profit can be deposited into your reserve fund or just left in the operating account. If left in the operating account, it does not have to be accounted for on the budget for the new year.
I cannot understand why you are asking this question. What does carrying over a net profit to the following year have to do with incurring a tax liability?
Frankly I'm wondering why you are doing this. IMO, the budget should only show anticipated income and expenses. Any net profit realized in the past year should not be used to defray the income or expenses anticipated in the coming year. That net profit can be deposited into your reserve fund or just left in the operating account. If left in the operating account, it does not have to be accounted for on the budget for the new year.
RogerB (Colorado)
Posts: 5,067
Posts: 5,067
Posted:
I agree with Mary. Laura appears to have no knowledge of what is taxable income for an HOA.
LauraD (Arizona)
Posts: 18
Posts: 18
Posted:
You are right, Roger. I do not but our Treasurer thinks we should spend all and end the year even. I'm trying to say with 2 - 3 grand set aside in the reports as "emergency" funds, we are OK!! That is why I came to my collegues at HOA Talk --- so I can be sure of what is what.
Thanks, Roger & Mary.
Thanks, Roger & Mary.
DennisT (Ohio)
Posts: 109
Posts: 109
Posted:
Random things to keep in mind:
An HOA/Condo association is NOT a 501(c)(3) (charitable organization) and hence is not tax exempt. In Ohio the association is responsible for paying sales tax on any products/services it buys/uses although it is exempt from local/state income taxes. Depending on how the property is parceled the association may have to pay property taxes on all or some of the common areas. For example at my last association the association had to pay property tax on a garage that was deeded to the association for the storage of supplies. For federal tax purposes the association has to pay taxes on any interest that may be earned, excepting of course securities that tax free. I don't know what type of tax treatment other states give to associations, particularly with respect to sales/property taxes.
When you have a surplus at the end of the year that is going into reserves you have what are called retained earnings. As the name implies, that means they are not paid out but instead are retained by the corporation for some authorized purpose. From the association's perspective this is not a taxable event.
An HOA/Condo association is NOT a 501(c)(3) (charitable organization) and hence is not tax exempt. In Ohio the association is responsible for paying sales tax on any products/services it buys/uses although it is exempt from local/state income taxes. Depending on how the property is parceled the association may have to pay property taxes on all or some of the common areas. For example at my last association the association had to pay property tax on a garage that was deeded to the association for the storage of supplies. For federal tax purposes the association has to pay taxes on any interest that may be earned, excepting of course securities that tax free. I don't know what type of tax treatment other states give to associations, particularly with respect to sales/property taxes.
When you have a surplus at the end of the year that is going into reserves you have what are called retained earnings. As the name implies, that means they are not paid out but instead are retained by the corporation for some authorized purpose. From the association's perspective this is not a taxable event.
MaryA1 (Arizona)
Posts: 7,043
Posts: 7,043
Posted:
Dennis,
HOAs can apply for, and are often granted, 501(c) status. My assn is a 501(c)(4) tax-exemp nonprofit corp as is Laura's. We do NOT pay sales taxes or income taxes. We file the Fed tax form 990. Paying property taxes has nothing to do with being exempt from paying income taxes. The 501(c) designations are for federal taxes only.
The year-end surplus does not get posted to retained earnings if it is deposited into the reserve account before the year-end adjustments are made. If the monies are left in the operating fund then the net profit will be adjusted to the retained earnings account. The net profit is only taxable if the assn is filing the corp 1120 tax return.
HOAs can apply for, and are often granted, 501(c) status. My assn is a 501(c)(4) tax-exemp nonprofit corp as is Laura's. We do NOT pay sales taxes or income taxes. We file the Fed tax form 990. Paying property taxes has nothing to do with being exempt from paying income taxes. The 501(c) designations are for federal taxes only.
The year-end surplus does not get posted to retained earnings if it is deposited into the reserve account before the year-end adjustments are made. If the monies are left in the operating fund then the net profit will be adjusted to the retained earnings account. The net profit is only taxable if the assn is filing the corp 1120 tax return.
MaryA1 (Arizona)
Posts: 7,043
Posts: 7,043
Posted:
Laura,
You are right to fight the treas. on this. To spend money just for the sake of spending is ridiculous. It would be much wiser to leave all, or a portion of, the excess in the operating fund as a cushion against any unforeseen expenses that may arise. If your reserves are in good shape then I would heartily recommend leaving all of the excess in the operating fund. Whatever you do with the excess there is no bearing on your tax liability. In fact being a tax-exempt org you most likely have no tax liability.
You are right to fight the treas. on this. To spend money just for the sake of spending is ridiculous. It would be much wiser to leave all, or a portion of, the excess in the operating fund as a cushion against any unforeseen expenses that may arise. If your reserves are in good shape then I would heartily recommend leaving all of the excess in the operating fund. Whatever you do with the excess there is no bearing on your tax liability. In fact being a tax-exempt org you most likely have no tax liability.
MaryA1 (Arizona)
Posts: 7,043
Posts: 7,043
Posted:
Laura,
On another note. Do you know if your assn is being billed taxes on your utility bills? Our new PM's accountant just discovered that we've been being billed taxes but our HOA is also a 501(c)(4) tax exempt org. He is negotiating with the city for reimbursemnet of paid taxes and is also in contact with the elec co. This is something you may want to check out. For some reason when we received our tax-exempt status the city and the elect co were not notified.
On another note. Do you know if your assn is being billed taxes on your utility bills? Our new PM's accountant just discovered that we've been being billed taxes but our HOA is also a 501(c)(4) tax exempt org. He is negotiating with the city for reimbursemnet of paid taxes and is also in contact with the elec co. This is something you may want to check out. For some reason when we received our tax-exempt status the city and the elect co were not notified.
LauraD (Arizona)
Posts: 18
Posts: 18
Posted:
Mary,
WOW! I'll check on that. Amazing what goes on.
WOW! I'll check on that. Amazing what goes on.
DennisT (Ohio)
Posts: 109
Posts: 109
Posted:
Mary while slightly off topic the point of my post was to make it clear that an association is not a 501(c) *(3)*. I realize that OP wasn't suggesting that, but it was a frequent issue that came up in my association. Owners would question why we had to pay sales tax on new landscaping and why they couldn't write off their association dues as being charitable donations "even though we're a 501(c)."
As I also pointed out, it's up to each state to decide what type of tax treatment they want to give associations with respect to non-federal taxes. In Ohio 501(c)(4)'s are exempt from income tax but not sales or property taxes. Arizona is obviously different in that respect.
As I also pointed out, it's up to each state to decide what type of tax treatment they want to give associations with respect to non-federal taxes. In Ohio 501(c)(4)'s are exempt from income tax but not sales or property taxes. Arizona is obviously different in that respect.
MaryA1 (Arizona)
Posts: 7,043
Posts: 7,043
Posted:
Dennis,
Sorry to have misread you. But your statement would have been much clearer had you stated that not all assn's are tax exempt under the IRS 501(c)designations. In order to have this designation, the HOA must apply to the IRS for it and the IRS will make the determination. Because the OP's assn IS a 501(c)(4) org, your statement was very misleading.
What a bummer that OH does not allow exemption from sales taxs to 501(c) orgs. I didn't know it was up to the individual state to determine if sales and property taxes will be exempt. As they say, you learn something new every day!
Sorry to have misread you. But your statement would have been much clearer had you stated that not all assn's are tax exempt under the IRS 501(c)designations. In order to have this designation, the HOA must apply to the IRS for it and the IRS will make the determination. Because the OP's assn IS a 501(c)(4) org, your statement was very misleading.
What a bummer that OH does not allow exemption from sales taxs to 501(c) orgs. I didn't know it was up to the individual state to determine if sales and property taxes will be exempt. As they say, you learn something new every day!
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