Our Coop Has No Depreciation L:eft: How Do We Save for the Future?

The principle is that maintenance fees in a housing co-op are not business income that is taxable but rather is like an individual putting aside some money for a rainy day. (If the co-op invests the maintenance fees and earns income, that is taxable, and if the co-op derives income from renting out commercial units, that is also taxable.) This principle was confirmed by a 1996 court ruling, according to this article: https://cnyc.com/code/277victory.htm. There is a parallel for condo owners (owners of real property) whose associations can file Form 1120-H to claim they don’t have to pay income tax on “exempt function income,” which is defined as common charges used to maintain common property: https://www.irs.gov/instructions/i1120h#en_US_2022_publink24935gd0e398
If the CPA is not convinced, can he or she point you to the relevant IRS tax rule or code? If all else fails, and you can’t find the relevant current IRS tax code, you could call the IRS and ask.

cate

in Taxes 8 months ago

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huesos | 8 months ago

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Our coop has been able to save several thousand dollars over time to slowly build up a depleted reserve fund. Our CPA just informed us that as the coop has no more depreciation it can use, this extra income (i.e. income more than expenses) will now result in the coop having to pay income taxes. It seems nuts that a coop can’t put away money for the future without paying taxes. The coop doesn’t earn any outside income so this is all from shareholder maintenance payments. Is there a way to get around this so we can do the right thing and save for future capital repairs without generating taxes?

cate | 8 months ago

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I’m not a co-op finance expert by any stretch, but it seems likely maintenance payments would be considered inside income and not subject to taxes (the interest, however, on the savings, would be outside income and therefore taxable). The maintenance is coming from the shareholders and they are the owners of the building. Here’s an old story on the question from Cooperator News: https://cooperatornews.com/article/new-ruling-on-irs-277

huesos | 8 months ago

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Thanks Cate. I had spotted that article before I posted but it’s from 27 years ago so not only is it somewhat unclear but I assumed there may have been some clarification in the intervening years but have been unable to find anything online so am still looking for a definitive answer.