"Excess" HOA dues

Started by cksiiEditor • 5 replies • 2614 views

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cksiiEditor (Colorado)
Posts: 12

Posted:

The company, which we use to help enforce covenants, attends our monthly HOA board meetings. The topic of additional dues came up and the representative for the management company said that we needed to be careful with regard to "excess" dues. He said that the HOA must spend what it takes in or the non-profit status of the HOA could be lost and we would be taxed at 30-plus percent. He did say that the IRS allows for reserve funds and said that IRS guidelines exist with regard to this specif issue.

Here are my questions. What would be considered "excess" funds? Is there a dollar amount or percentage of revenue amount? Where can I find the IRS guidelines for properly creating and maintaining reserve funds?

Thanks.

RogerB (Colorado)
Posts: 5,067

Posted:

I have previously posted on the IRS guidelines regarding operating and reserve funds - they must be kept separate. There do not need to be any excess funds. Your representative should know to establish the annual budget (including the assessment) one reviews the operating funds needed -- PLUS -- the long range (20 year) reserve plan to determine the amount to be allocated to reserves. Any leftover operating funds can be held over until next year or can be placed in the reserve fund - neither has any tax obligation when using IRS form 1120-H. To read the IRS instructions start with the IRS web site and go to form 1120-H.

There are several posts on this subject on this site - try searching "1120-H" and "Reserve Funds". Following is one of my posts:
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HOA's are not exempt from filing taxes. Each Association needs to file Federal and State Income taxes. The Federal tax can be done without using a CPA or even a tax consultant by anyone who can read the instructions of federal Form 1120-H. 1120-H tax is calculated by multiplying 30% on the income from interest, yield, and/or dividends earned less deductables, including the $100 standard deduction, the previous year's state tax, and any costs involved in managing investments. Or by using Form 1120 which is more complex but taxes at 15% (for most HOA's using 1120-H is usually the best option). I complete the taxes forms at no charge for the HOA's I manage, it takes about 5 minutes.

Disclaimer: I am not a CPA or a tax consultant.

BarbaraS (New Mexico)
Posts: 49

Posted:

I called our state (NM) taxation department and was told that HOA's do not have to file a state tax reports, unless they have incorporated. We are not incorporated and use the 1120-H form.

RogerB (Colorado)
Posts: 5,067

Posted:

BarbaraS, I suggest you look at the advantages vs. the disadvantages of incorporating the HOA.

RogerB

CharlieT (Texas)
Posts: 12

Posted:

Our HOA communtiy in the state of Florida is incorporated as-not-for profit. The tax we pay is called a non-valarium tax. This tax is a county tax for the drainage district and solid waste authority.

HankL
Posts: 47

Posted:

One advantage of incorporation is that you have exclusive use of your Association's Name. If another Association is incorp[orated, andy you are not, they can legally take your name and there is little you can do about it.

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