HOA Activity Funds

About 10 residents organized an activity group to hold events/parties for our community to enjoy. It started about 4 years ago and the then President of the HOA told them to keep their money separate. So they opened an account, under the activity name it was given, in a local bank. The monies that are made are accounted for when an activity takes place. Now the BOD wants this group to combine their money, which they do not want to do, as they need access to this money to do shopping, give deposits, etc.

The By Law Policy states as follows:

"All Activities are governed by the HOD-BOD and need to be approved by the Liason member responsible for Activities. Each Activity with elect a Committee and Chairperson to guide the programs of that Committee.

All monies collected for/by any [NAME OF COMMUNITY] Activity (such as Bingo, Flea Market, Crafts, etc.) belong to the HOA and are to be deposited in the Activity Account. Chairpersons of each Committee may make recommendations on how to spend monies and while every effort will be made to approve such recommendations, the final decision on how monies will be spent rests with the BOD."

The Rules and Regulations states as follows:

"At the option of the Board, all finances (including debits and credits) must be processed through the Association's treasury."

So, if it's at the option of the Board, could the Board just grant permission to continue to keep this Activity fund separate?

Everything runs extremely smoothly under the way it is being run, the parties/events are always a success, and if any taxes are to be paid, they are given to the Association. Is there anything illegal about this? I suggested that the Chairperson of the Activities Committee (who is an Officer on the Board), have his/her name put on the account, along with a few of the committee members, and have two signatures on checks that are written, one signature always being that of the Activities Chairperson.

Thank you for your help.

This information is not accurate.

Taxation has to do with how money are spent, not how they are raised. if you have a bake sale and them money benefit all the members it wouldn't be taxable. Another limitation is percentage of these money in comparison with regular assessments. Fines and penalties are never taxable because they are part of your association normal business.

So they opened their own bank account under their own name, write their own checks and deposits. Tell me again why you think board has any control of what this group does. It sounds completely independent to me. Why cant the group just say no?

Thanks for the info Bruce. I didn't think that was right but didn't have the info to say otherwise.

Bruce, I run a non profit corporation and have been doing for about 10 years now. I am talking an actual charitable non profit. It's not a job, is's giving back, but .....

We are allowed to have fundraising (sell items, rent equipment, etc.) and as long as our total income from those activities (not considered our main activity) does't exceed some percentage (can't recall the exact number now) it doesn't become taxable. If it did exceed that we would have to file a separate tax form and pay taxes on that income. The only thing is that money is not tax deductible to people that spent it, unlike donations which we are able to accept.

Is it different for HOAs?

The difference is which section of Title 26 (The Internal Revenue Code) the organization comes under.

Non-profit organizations fall under Section 501. Charitable organizations generally fall under 501(c)(3). A civic league or organization that is operated exclusively for the promotion of social welfare falls under 501(c)(4). Chambers of Commerce come under 501(c)(6). Non-profit clubs organized for pleasure or recreation come under 501(c)(7). Those are some examples.

In order for Section 501 non-profit organizations to be exempt from taxes, they must file Form 1023 or 1024 to apply for tax-exempt status. The IRS will than send a letter advising whether or not approval for tax-exempt status has been granted. Different organizations have different income and permitted expense requirement. IRS Publication 557 provides more information.

An HOA comes under Section 1.528 and is different in that it is like any other corporation which files Form 1120, EXCEPT that if certain income and expenditure tests are met it may ELECT to be treated with the preferred tax status of an HOA. It must make this election EACH YEAR and does so by simply filing Form 1120-H instead of Form 1120 for that year.

By the way the safer way for a group to raise money for recreational purposes is to form an organization and apply for 501(c)(7) status. I believe as such an organization the expenses of holding parties and such for the benefit of members would be deductible. One would have to read the rules to be sure.