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Tri Park consultant warns grants can trigger taxable status for limited‑equity cooperatives
Summary
A Tri Park development consultant told the House committee that receiving substantial grants can push limited‑equity cooperatives out of IRS income/expense tests that allow homeowner‑association tax treatment, potentially generating large corporate tax liabilities unless grant programs are structured as beneficiary payments.
A development consultant for Tri Park told the House General & Housing Committee on Jan. 28 that limited‑equity cooperatives face federal tax rules that can turn grant income into taxable corporate revenue and create large tax liabilities.
Dan Riddle Hoover said the IRS treats many limited‑equity cooperatives as for‑profit entities for tax purposes and described two critical tests cooperatives use to qualify for homeowner‑association tax filing: an income test (greater than 60% of gross income must come directly from members) and an expense test (90% of expenses must serve association‑owned improvements). He told legislators that receiving grant dollars large enough to change those ratios can force a co‑op to file as a corporate entity and pay income tax.
Riddle Hoover gave a numerical example based on registry data and median lot rents: for a park of roughly 30 units with a median lot rent of about $415 annually, a $100,000 grant would likely push the organization past the income test threshold. He described a workaround the Agency of Natural Resources used in 2023, reframing funds as beneficiary payments under the general‑welfare exclusion to avoid triggering corporate taxable income.
"Receiving grants of almost any size…basically pushes any scale of mobile home park that exists in Vermont out of compliance with that test," Riddle Hoover said, summarizing the practical effect on co‑ops. He also described Tri Park’s solution of assigning grant awards to nonprofit partners to construct improvements and then convey completed infrastructure back to the cooperative.
Committee members asked whether state law could address the federal tax treatment; the witness said federal tax rules limit what state action can accomplish, but cited program design options (deferred loans or beneficiary‑payment structures) state grantmakers can adopt to limit tax impacts. The hearing included follow‑up questions on whether the tax exposure made alternative delivery structures — partnerships with 501(c)(3) or 501(c)(6) organizations — worthwhile.
The committee received the testimony and asked follow‑up questions; no formal action was taken.
