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Subject: Insurance claim payments
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RickE1
(Louisiana)

Posts:17


11/17/2012 8:51 AM  
Having filed the 1120-H form the past few years as Treasurer of our Condo Association, I have familiarized myself somewhat with the 60% exempt income & 90% expenses rules as well as not calculating the reserve accounts into the equation. However, after having major damage from Hurricane Isaac, we have received insurance settlement money amounting to well over $50K for damages to several of our buildings (roof & siding replacement & some interior from the roof leakage). Common sense tells me this money should not be factored into the income section of the form, but when has common sense ever mattered to the I.R.S.? I've gone over the instructions for the 1120-H and can not find where this matter is addressed. Also..when you put money into the reserve account, it is not counted, but what about when you take it out?? This we will have to do as the insurance proceeds were not enough to cover all the damages due to very high deductables applied in the Hurricane or storm damages clauses in our policy.
Does anyone have experience in dealing with these matters when filing the 1120-H? or would it best be served in placing this problem into the hands of a CPA or paid tax preparer?? We are a small 28 unit complex with otherwise no income other than dues & some interest on the reserve account.
TimB4
(Virginia)

Posts:16199


11/18/2012 6:06 AM  
Rick,

Your thread is similar to a new thread: Subject: How to treat insurance payment/loss in taxes

I would suggest you keep an eye on that thread as well.

I do not have the answer for you. We do have some people on this forum who work in the tax field and will likely respond. Since it's a Holiday week, it's also possible that they are on vacation and/or need to verify information at the office first, so it may take awhile.

Tim
TimB4
(Virginia)

Posts:16199


11/18/2012 6:20 AM  
Rick,

I can provide the following links that may be helpful:

IRS Form 4684, Casualties and Thefts
IRS Publication 547 (2011), Casualties, Disasters, and Thefts


Sorry I couldn't provide more assistance.
BruceF1
(Connecticut)

Posts:2535


11/18/2012 3:08 PM  
Rick, Stuart,

I'll tackle the easier question first. Although I prepare tax returns professionally, DO NOT consider the following as absolute tax advice. For that, you should consult a CPA who can look at your situation more precisely.

First, you need to understand that lines A through E of form 1120-H are not used to calculate any taxes that may be due. They are merely the "information" portion of the return the IRS uses to determine if the HOA is qualified to file form 1120-H. Any and all expenses that qualify as for the 90% expenditure test get reported on line C. That means all expenditures related to the maintenance, operation, repair, etc. of HOA property. It doesn't matter where the money comes from: regular assessments, special assessments, or reserves. DO NOT include the money from insurance reimbursements/proceeds.

Now, on to the more difficult question: What to do about insurance proceeds. Non-exempt income? Or, what?

This gets complicated. There's no place to report such income on 1120-H, nor is there a place for losses due to property damage, etc. Several problems here: One is that filing 1120-H is like filing 1040-EZ. There's no place on Form 1040-EZ to take a deduction for medical expenses, report certain types of income, or claim a deduction for property losses. That means to do this you would have to file Form 1120 instead of 1120-H, but that comes with its own set of problems since any excess income from your regular assessments, such as the money you put into reserves, looks like "profit" and would be taxable, unless you've done some fancy and complicated bookkeeping during the year.

The second problem comes from that fact that it may be difficult, if not impossible, to determine what the adjusted basis is for HOA common property. That has to be the starting point for determine how much, if any, of insurance proceeds are taxable.

Let's look at insurance proceeds:

In general, proceeds from life insurance, or from health insurance used to pay medical expenses, are not taxable. There can be exceptions, but they are rare.

Insurance proceeds to pay for property damage or loss work differently. They may or may not be taxable depending on the circumstances. Furthermore, some people mistakenly believe that if the proceeds exceed what it costs to repair or replace the property, the difference is taxable. That's not exactly how it works, although many times it does come out that way.

In simple terms, property damage/loss proceeds must be used to offset the financial loss because of the property damage/loss. Whether or not the net loss (if any) can be taken as a deduction depends on whether it is personal property or business property. The rules are different. For a simple example, if you have suffered a $10,000 loss of which $8,000 is covered by insurance, you have a net loss of $2,000. Whether or not you can actually deduct that loss depends on whether it is personal or business property.

So, how about your case? Well, for each of you there has been total loss (your cost of repair) minus the amount reimbursed by insurance, leaving you with a net loss, paid for out of your own funds. You have already reported that net loss in the expenses you reported on line C. What about the insurance proceeds? It's a wash. If you had reported it as income somewhere on your return, you would have reported that same amount (either separately or as part of a total) elsewhere on the return. You simply don't need to report it anywhere since you are only reporting the difference (the amount not covered by insurance) as an expense.

So, what if the IRS doesn't agree and says you omitted something? Basically, nothing, other than redoing all the paperwork. Penalties and interest are only assessed on any additional tax due, and since there would be no additional tax due since you would report the insurance proceeds and the added expenses (which are the same and would cancel), there would be no penalties or interest either.

Short answer? Don't worry about reporting the insurance proceeds. Just don't report the amount covered by the proceeds as an expense.

Still, it's best to consult a CPA who can review your individual situation.
RickE1
(Louisiana)

Posts:17


11/19/2012 12:27 PM  
Thanks Tim, somewhat helpful. However Bruce from Connecticut's in depth reply gives me resolve as how to proceed.
RickE1
(Louisiana)

Posts:17


11/19/2012 12:35 PM  
Put reply in wrong box for Tim. Sorry! But Bruce I find your last few paragraph pretty much sums up how I will proceed....Don't report the proceeds...They will go into the reserve fund account & all repairs & replacements will be paid out of that account so as to be easily deliniated if the IRS does come back & audit. As you say...If I go out & spend the Associations money to file the 1120 & come to the same conclution, this violates the common sense approach I like to cling to. I will still mull this over for the next few months as I have till March 15th to file......Thanks once again for your insight!!
TimB4
(Virginia)

Posts:16199


11/19/2012 1:31 PM  
Yep, Bruce was one of the people I was hoping would reply.
BethW4
(California)

Posts:11


11/20/2012 4:54 AM  
Well, i will suggest yo to consult the the best financial service provider in your town who can help you in taking the correct decision, so that you can easily cover all you damage without spending a single penny from your pocket.

Legal Transcription at GMR Transcription
TimB4
(Virginia)

Posts:16199


11/20/2012 4:58 AM  
Posted By BethW4 on 11/20/2012 4:54 AM
so that you can easily cover all you damage without spending a single penny from your pocket.




Well...There's always that pesky insurance deductable
RickE1
(Louisiana)

Posts:17


11/20/2012 11:20 AM  
Beth, as stated in my original post, the high deductables for Hurricane coverage guarantees that we will have to pay out of our pocket (please dont say "my pocket" as this has a bad connotation for an Association Treasurer)to cover all the repairs & replacements we are responsible for and that the adjusters detailed report said was incurred. The only financial decision to make is for the Board of Directors to choose from among several bids for the roof replacements & the handman repair service we normally use and which has been more than satisfactory both in the quality of work and for the amounts charged.
Thanks for your advice & concern ...but hopefully we have this part of the problem under control.
RobertS66
(West Virginia)

Posts:1


03/04/2019 5:48 PM  
I am the treasurer for a small condo association (36 nits) and my situation is similar to others on this thread. We had some damage due to a broken water pipe last winter (2018) and the Insurance company reimbursed us for all, but $2000 of the damage. So we had a loss of $2000. If I don't claim the loss on the tax return, do I even need to report anything on the 1120-H?
GenoS
(Florida)

Posts:2770


03/06/2019 10:00 AM  
This thread is over 6 years old, RobertS66. Please start a new one for your question. And welcome to the forum.
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