When faced with HOA donations, many homeowners associations have no idea how to proceed. Donations are great because they improve cash flow, but they can also have certain tax and legal implications. Board members don’t always know whether or not they can accept donations. Even when they can, most HOA boards don’t know how to handle them.
What are HOA Donations?
In simple terms, HOA donations refer to funds given to a homeowners association. Virtually anyone can make donations to the HOA, including residents, service providers, and even non-members. While most donations are monetary, they can also include volunteered time or labor.
Can the HOA Accept Donations?
Many organizations accept donations, especially charitable ones. While an HOA is considered an organization, it is not specifically set up to take donations. An HOA earns its revenue from homeowner dues, which are then used to fund expenses in the community. It works in a cyclical way.
Homeowners association donations are relatively uncommon, but that doesn’t mean HOAs can’t accept them. The answer can be found in the HOA’s governing documents. The CC&Rs and bylaws should address donations and whether or not the HOA can accept them.
That said, an HOA generally can accept monetary or property donations, provided the donor is willing. There are some key considerations to make before taking this step.
Reciprocity Expectations
Donations should not come with any strings attached. If an HOA accepts a donation, it should not be expected to give anything in return to the donor, including special treatment. Some homeowners make donations and expect to be exempt from the rules. They might give money freely now, but use it as leverage later on.
Potential Liability
If the governing documents don’t mention it, an HOA typically can accept donations, whether in cash or labor. These contributions can come from residents, contractors, or non-members.
Still, board members should be cautious about accepting unpaid labor, especially when the task requires proper licensing or insurance. Anyone performing work for the HOA should carry the necessary credentials. If not, the HOA could be held liable for mistakes or injuries that might have been avoided by hiring professionals or using a formal bidding process.
Insurance Implications
The HOA board should alert its insurance provider of any volunteer labor. In doing so, board members can verify whether or not the association’s policy can cover the work. If the policy doesn’t cover voluntary labor, it may be best for the HOA not to accept it.
Should the Board Disclose HOA Donations to Homeowners?
Yes, the HOA board should disclose any donations to the homeowners. Board members must present financial reports and make these records available to homeowners for examination. These reports must always reflect the donations the HOA accepts.
Disclosing HOA donations can help build trust and transparency within the community. It might even encourage others to make donations in the future.
Are Donations Tax-Exempt?
In the eyes of the Internal Revenue Service, homeowners associations are not tax-exempt organizations. This means that donations to an HOA would still be taxable. Board members should check with their accountant or HOA management company to understand the tax implications of accepting donations.
HOA Donations: What to Do and How to Manage Them
When an HOA receives a donation, board members should not treat it in the same way as dues or assessments. While HOA donations should serve community-related purposes as well, there is a proper way to handle them.
1. Establish a Policy
First, the HOA should establish a policy that defines what constitutes a donation and how the HOA will use it. For example, an HOA might only be able to use donations for community events, landscaping, and common area improvements.
Additionally, this policy should outline the acceptance criteria. What types of donations can the HOA accept (cash, in-kind, labor, etc.)? The policy should also state if there are any limitations on the amount or type of donations.
Next, the policy should clearly list the donation process. How can individuals or entities make donations? Can they do it online or in person? Moreover, the policy should establish what information is required from the donor, such as name, address, and contact information. Of course, donations can also be anonymous.
Finally, the HOA board should make sure to publicize this policy. Of course, don’t forget to acknowledge the donation and show gratitude. The HOA can make a public announcement or send a thank-you letter.
2. Track, Separate, and Report Donations
It is important to track and report donations as well as keep them in a separate bank account. The board should keep detailed records of all the donations the HOA receives, including the donor’s information (if available), the amount, and how it was used. Furthermore, the board must provide regular reports to the residents on the status of the donations and how they were used.
Tracking donations is easier when an HOA deposits them into a separate account from the dues and assessments. This also ensures proper use and easier reporting.
3. Clarify Restrictions
If a donor asks the HOA to use the donated money for a specific purpose, such as a new bench or landscaping, the HOA must either honor that request or decline the donation. Should the HOA use restricted funds for something else, it may find itself and its board in legal trouble.
4. Use for the Community
Donations should never be used for personal gain. The HOA should only spend donations that serve the community’s best interest. No individual board member or resident should benefit from the donation unless it is part of a community-wide event or project.
5. Follow the Proper Approval Process
The HOA board should still go through the proper approval procedures when allocating donated funds. Board members should still discuss the funding at an open board meeting, make the right motions, secure the votes, and record them in the minutes.
Can an HOA Raise Money from HOA Fundraising?
Yes, an HOA can plan fundraising activities in lieu of levying special assessments, but only if state laws and the governing documents allow it. Board members should also consult professionals to understand if any legal or tax implications come with fundraisers.
Generally, an HOA should use funds earned from fundraisers for community-related purposes. Examples include maintenance, improvements, and amenities. Board members should check their CC&Rs and bylaws for guidance.
While fundraisers may be more palatable to homeowners than special assessments, there are some key differences to consider. For one thing, fundraising is voluntary, which means homeowners aren’t obligated to give anything. On the other hand, special assessments are mandatory. An HOA may not earn enough money it needs through a fundraiser alone.
If the expense is urgent or mandated by law, it may be best for an HOA to rely on special assessments instead. Special assessments are legally binding and guarantee more funding. Either way, an HOA should be transparent in its reporting for both fundraisers and special assessments.
For the Community
Homeowners associations often have a hard time with financial management, and HOA donations don’t make it any easier. Since donations come with certain implications and considerations, boards should not accept them without thought. Ultimately, the HOA board should look out for the community’s best interest.
Clark Simson Miller offers expert financial management services to homeowners associations and condominiums. Call us today at 865.315.7505 or email us at help@csmhoa.com to get started!
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