HOA IS A NON PROFIT ORGANIZATION.

I have been a member and board member for several years. Two years ago we had around $25,000 carried over from year to year and the old guard did not want to spend it. We finally talked them into spending $10,000 on new bingo equipment as thats where we get 60% of our income.

Being a nonprofit, is there any rule saying we have to spend that money or a limit on how much we can have in this fund?

I would think that the income from Bingo would be taxable.
I would be concerned that this is 60% of your income.

I am not an accountant.
I am not an attorney.

As David suggested, check with one of them.

In my Association, any excess funds (which is usually very little) go into the Reserves or Contingency fund based on a vote by the Board.

Bruce...great accountant question, ask whoever does your taxes for the association

Bruce,

Based on your post (above) it appears you may not be qualified for favorable tax treatment as an HOA and you may not be able to use IRS Form 1120-H.

In order to qualify as an HOA and use Form 1120-H you must meet both a 60%/40% income requirement and a 90%/10% expenditure requirement.

Sixty percent, or more, of your income must be exempt function income. This is income from association dues that every resident pays (usually, equally). No more than 40% of your income may be non-exempt function income. Non exempt function income is income received from other sources, such as interest on deposits, dividends, income from clubhouse rentals, etc. Income from bingo would also be considered non-exempt function income. Using 1120-H, exempt function is not taxable, whereas non-exempt function income is taxable. From what you have posted, 60% of your income is non-exempt function income which disqualifies you from filing 1120-H.

People often also wrongly assume that because an HOA is non-profit (at least, it's supposed to be) that it qualifies as a tax exempt organization under section 501, and worse, as a 501(c)(3) organization. In order to qualify for tax exempt status under section 501, an organization must apply to the IRS by filing the appropriate form (1023, 1024, etc.) and receive approval from the IRS to be treated as tax exempt.

Susan,

I don't completely agree with you. Although it is true if the money from bingo is "earmarked" for specific use related to the HOA's real estate and related operating expenses it would help meet the 90/10 expenditure requirement, the source of the income, according to the OP, does not meet the required 60/40 income requirement. Since bingo revenue is non-exempt function income and it exceeds 40% of their annual budget, they are not eligible for special tax treatment as an HOA and all income is taxable. The requirements are detailed in 26cfr1.528-6 through -9.

Although they may consider themselves to be non-profit, they are not considered to be tax exempt by the IRS unless they have received approval from the IRS granting them tax-exempt status. HOAs apply for special treatment annually by filing their taxes on Form 1120-H.

I believe in most (if not all) states, either a license or a permit is required to conduct bingo games and such permits are usually granted only to organizations that have been granted specific types of tax-exempt status by the IRS, such as 501(c)(3) organizations.

I assume the OP refers to an HOA because HOA appears in the title.

Although I am not an accountant, I am employed as a trained tax preparer by an accounting firm.

Nope.

So there will be no confusion, below are excerpts from 26cfr1.528:

"§ 1.528–5 Source of income test. An organization cannot qualify as a homeowners association under section 528 for a taxable year unless 60 percent or more of its gross income for such taxable year is exempt function income as defined in §1.528–9."

"§ 1.528–9 Exempt function income. (a) General rule. For the purposes of section 528 exempt function income consists solely of income which is attributable to membership dues, fees, or assessments of owners of residential
units or residential lots."

- - -

"Furthermore, income attributable to dues, fees, or assessments will not be considered exempt function income unless each member’s liability for payment arises solely from membership in the association. Dues, fees, or assessments that are based on the extent, if any, to which a member avails him or herself of a facility or facilities are not exempt function income."

Because a member pays a fee for the purpose of playing a game, and the fee is usually based on the number of cards to be played and for a particular bingo session, and it is not paid by all members, it does not qualify as exempt function income. To be considered exempt function income, a "bingo fee" would have to be charged to all homeowners who desired to play bingo. The fee would have to permit them a specified number of cards, entitle them to play at any time for an entire year, and be charged only once a year. This is easier to understand with a pool use fee. A pool use fee charged to a member once a year to use the pool all year is considered exempt function income. However, a pool use fee charged to a member each time the member uses the pool is not exempt function income.

The IRS rules are rather complicated. However, not to worry. If the IRS feels you have not paid the proper taxes, they will just send you a bill for what they think you owe.

First of all, my HOA is in Florida. Second, we do not have any budget. We only spend money when
we have an activity like a Xmas dinner for the park, new bingo equipment, etc. Third I audited
last years Treasurers account and there was never a payment it the IRS for any money made at bingo or otherwise.

Does that mean we failed to do something?

Our dues to join the HOA is two dollars. The rest of the money comes
from lunches and dinners we hold. Bingo gives us from $6,00 to $8,000 revenue a year.

We have almost $20,000 in the bank from past years income. None of it
is earmarked for anything.

Do we have a problem?

It sounds like you are operating more like a 501(c)(7) organization (social and recreational clubs) than an HOA.

ALL organizations that receive income in any form, including ALL non-profits, are required to file income taxes (except 501)c)(1) organizations). The tax form for 501(c)(x) organizations is generally either Form 990 or Form 990EZ.

Have you failed to do something? Most likely, yes.

Do you have a problem? You might.

Many people form groups for certain activities and, being ignorant of the tax code, mistakenly believe they can operate without filing income tax forms, and manage to go on for years without a problem. But, that doesn't make what they are doing legal insofar as the IRS is concerned.

If you have money in a bank account and if that money is earning interest, in whose name is the 1099INT made out to? The IRS gets a copy of that 1099INT and someone has to pay taxes on it.

By the way, being a tax-exempt organization doesn't mean the organization never has to pay taxes. Tax-exempt organizations may have to pay taxes on a portion of their income under certain circumstances. That's why they are required to file Form 990 or Form 990EZ every year.

Jacqueline,

The Association may not make a profit through assessments. However, an Association may enter into other activities (like bingo) providing that they follow State laws regarding that income. The Association would also have to pay tax on that income (just as they pay taxes on interest earned in a bank account).

As I understand it, depending on how much they make and how that money is used, the Association may or may not have issues with their non-profit status. If they lose the non-profit status, then all the money received from assessments would be taxable.

Tim

You need to carefully check your state laws regarding such activities. In Connecticut, for example, only 501(c)(3) organizations (which an HOA is not) may obtain a permit to conduct bingo.