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RenaeW1
(South Carolina)

Posts:39

09/18/2008 8:25 AM
Our HOA has around 70 houses with a pool, curbs, front entrance area that we are responsible for. We, of course, also pay routine maintenance fees, utilities, insurance, etc. We have no reserve account and I have been very nervous about this and have suggested to the other two board members that we start one. Our bookkeeper checked with our accountant and she thinks that if we start this reserve account it will change our non-profit status. Does this sound correct? She is suggesting we go down on our HOA fees or spend the money.

GeorgerwilliamsW
(Indiana)

Posts:707

09/18/2008 8:35 AM
This is absolutely wrong as far as the federal Internal Revenue Service is concerned. Period. End of discussion. It sounds to me that your accountant is unfamiliar with tax laws. Change accountants now. Now, with that said, any investment income or interest your association receives as a result of investing the reserve fund is reportable and taxable. But don sweat it. You probably have to file an association tax return every year anyway, so paying the corporate tax is no big deal. Just do it and don't worry about it. For your own information read the instructions from the 1120-H. They are not difficult to understand. http://www.irs.gov/pub/irs-pdf/f1120h.pdf Reserve funds are quite common and mandated in some states. Get one started soon by contracting for a reserve fund study.

RenaeW1
(South Carolina)

Posts:39

09/18/2008 8:46 AM
I looked at the website you submitted above. Can you explain what this means. Does it mean you can only put 10% of your fees/income into a reserve account? c At least 90% of the association’s expenses for the tax year must consist of expenses to acquire, build, manage, maintain, or care for its property, and, in the case of a timeshare association, for activities provided to, or on behalf of, members of the timeshare association.

GeraldT4

Posts:932

09/18/2008 8:46 AM
RenaeW1 - Interesting, HeatherJ is also from South Carolina, has signs in the front but she says there are no amenities. Are you both from the same association? Yes, or no? Read my post to Heather re: Calculating Reserve Fund. Reserve Funds are a necessary component, and requirement when there are common elements that need to be eventually replaced (pool, signs, etc.) The description of the common elements are in your governing documents, or should be. There is no IF you start a reserve account, only a WHEN, and WHY haven't you started one. Your board members may be held guilty if one isn't started. The date of construction of the common element will also need to be established because the clock for reserve fund transfers has already begun, you are behind the 8 ball in reserve transfers. Meaning if the date of construction of the common element was say Sept. of 2006, the common element is now 2 years old. If the element has a 15 year life-span, and the cost of construction of the common element is $3,000.00, you missed two years of funding that needs to be made up, otherwise you will have a shortfall when the element needs to be replaced. Weather owners like it or not, they have a responsibility to the association to pay it forward, even though they may not be living in the association in say 15 years when the element needs to be replaced. Often the reason why many board members and owners are stingy when it comes to funding reserves. They figure, "I won't be living here in another 5 years so why should I care about it now". The answer to that is caring isn't a choice, it's an obligation, and more often than that it's the Law.

RenaeW1
(South Carolina)

Posts:39

09/18/2008 8:57 AM
Posted By GeraldT4 on 09/18/2008 8:46 AM RenaeW1 - Interesting, HeatherJ is also from South Carolina, has signs in the front but she says there are no amenities. Are you both from the same association? Yes, or no? Read my post to Heather re: Calculating Reserve Fund. Gerald: No to Heather being on my Board. Her neighborhood sounds similar to mine, but we do have a pool and small pool house with bathrooms. Gerald and George: Thanks for the comments, info. and insight. There is a wealth of information on this site.

MaryA1
(Arizona)

Posts:2248

09/18/2008 9:35 AM
Posted By RenaeW1 on 09/18/2008 8:46 AM I looked at the website you submitted above. Can you explain what this means. Does it mean you can only put 10% of your fees/income into a reserve account? c At least 90% of the association’s expenses for the tax year must consist of expenses to acquire, build, manage, maintain, or care for its property, and, in the case of a timeshare association, for activities provided to, or on behalf of, members of the timeshare association. Renae, I believe the money deposited in the reserve account is not an expense, rather it's shown as a decrease (credit) in the income portion of the balance sheet. What this requirement means is that 90% of the assn's expenses must fall into the categories listed.

MaryA1
(Arizona)

Posts:2248

09/18/2008 9:40 AM
Renae, George stated: "Now, with that said, any investment income or interest your association receives as a result of investing the reserve fund is reportable and taxable. But don sweat it. You probably have to file an association tax return every year anyway, so paying the corporate tax is no big deal. Just do it and don't worry about it." I might add that when filing the fed. tax form 1120H (specific to HOAs) there is an automatic $100 credit on the tax due. So, if your assn has a small reserve account that doesn't earn much interest (less than $100) there will actually be no tax due. You should also check with your state to see if there is a requirement to file a state tax return. In AZ, the HOA tax return has an automatic $50 FEE -- the State wants to make certain they get something from us, while the Feds give us a credit!

MicheleD
(Kentucky)

Posts:1707

09/18/2008 9:47 AM
Yes. This is the way I understand it. That's 90% of the EXPENSES must be in those category. It doesn't say that 90% of the REVENUE is to be used for expenses. If you have spent $100 and at least $90 of those expense dollars went to upkeep and maintenance, then you're okay. If you spent $100 and only $60 of those expenses went to upkeep, and $40 went to gifts, you would have problems. But if you collected $500 that year, but only spent $100, and at least $90 of that money expended was for upkeep and maintenance, and the $400 just stayed in the bank, you're okay.

RenaeW1
(South Carolina)

Posts:39

09/18/2008 9:57 AM
Mary and Michelle: Okay, I think I get it. These tax things are hard to understand sometimes. I could just foresee this question coming up and I certainly didn't know how to explain it. I think I do now. That's good to know about the $100 allowance also. Since we are just pursuing starting this reserve account, interest over $100 shouldn't be a problem.

GeorgerwilliamsW
(Indiana)

Posts:707

09/18/2008 10:15 AM
"I might add that when filing the fed. tax form 1120H (specific to HOAs) there is an automatic $100 credit on the tax due." Sorry, Mary not correct again. It is a $100 deduction from gross income on line 18. It is not a tax credit from line 21. It is clearly shown on the 1120-H as a deduction. There is a big difference between a deduction and a credit. You are taking a deduction from income, not from the taxes you owe. Please be more careful in your postings.

RogerB
(Colorado)

Posts:3702

09/18/2008 10:36 AM
Posted By RenaeW1 on 09/18/2008 8:25 AM Our HOA has around 70 houses with a pool, curbs, front entrance area that we are responsible for. We, of course, also pay routine maintenance fees, utilities, insurance, etc. We have no reserve account and I have been very nervous about this and have suggested to the other two board members that we start one. Our bookkeeper checked with our accountant and she thinks that if we start this reserve account it will change our non-profit status. Does this sound correct? She is suggesting we go down on our HOA fees or spend the money. Renae, You should have a reserve account. Obviously your accountant is not qualified in this field. The use of form 1120-H requires that an HOA meet two qualifications (most HOAs have no problem qualifying to use 1120-H). 1. 90% rule - 90% of its expenditures must be related to your HOA. In other words, you can not provide over 10% to HOA expenditures which are not directly related to your HOA. 2. 60% rule - atleast 60% of the association’s gross income for the tax year must consist of exempt function income. In other words not over 40% of the HOA's gross income can not come from outside sources. Outside sources include thing like interest on investments and funds obtained from a separate charge for use of swimming pool, golf course, etc. (income above and beyond the assessement on each property). Using 1120-H, taxes owed = (income from outside sources - deductables) x 30%.

Roger Borcherding Official HOATalk.com Sponsor DARCO Property Management (Colorado) (303) 925-0150 *See legal notice below (end of page) or go to www.hoatalk.com/legal

MaryA1
(Arizona)

Posts:2248

09/18/2008 1:02 PM
Posted By GeorgerwilliamsW on 09/18/2008 10:15 AM "I might add that when filing the fed. tax form 1120H (specific to HOAs) there is an automatic $100 credit on the tax due." Sorry, Mary not correct again. It is a $100 deduction from gross income on line 18. It is not a tax credit from line 21. It is clearly shown on the 1120-H as a deduction. There is a big difference between a deduction and a credit. You are taking a deduction from income, not from the taxes you owe. Please be more careful in your postings. George, Sorry, I misquoted that. I'm slapping myself because I should know better! :-(

SusanW1
(Michigan)

Posts:2178

09/18/2008 1:35 PM
Reneae - our bylaws state that we have a Reserve Fund and states its purpose, too. We MUST produce a 20 year plan for our member, to be update every 3 years. That give us authority to have this large fund, since Michigan is really loose about homeowner associations like ours (NOT a condo)and we have 11 bridges over canals to keep in running order, PLUS our own water system.

JeannieraeO
(California)

Posts:27

09/18/2008 5:17 PM
A reserve account is not income. Having a reserve account does not change your non-profit status. You need a new accountant. Lots of accountants think they can get into the HOA business and crash and burn. There are lots of special rules around HOA accounting and if you don't know them you can get into big trouble. Your accuntant not only does not understand HOA accounting, but she doesn't understand non-profit funding either. Assessments are the money that you take in to manage your HOA. In California, you are required to have a reserve account against future replacement/repairs of common property. The only income that is taxable is the interest on your Reserve Account. That does not jeopardize your non-profit status, it just means that by federal law, the interest you earn on your reserve account is not exempt from taxation. Paying tax on your interest is a good thing, since it means you have a healthy Reserve Account. I would suggest that you contact your local Community Association Institute chapter and find a competent CPA.

KirkW1
(Texas)

Posts:1145

09/18/2008 7:57 PM
Some things to keep in mind: - You do not have to file 1120-H, you can also file straight corporate income tax return with a graduated rate. My understanding is that most HOAs benefit from the special form for them though. - If you don't get a reserve fund, you may find that none of the property is eligible for financing. I read recently that Freddie Mac now has requirements concerning reserves to be eligible. - If you don't get a reserve fund going you will have a major assessment in the future. - Non-profit status is something with the state. There is no direct connection to the IRS.

MaryA1
(Arizona)

Posts:2248

09/19/2008 4:56 AM
Renae said: "Our bookkeeper checked with our accountant and she thinks that if we start this reserve account it will change our non-profit status. Does this sound correct? She is suggesting we go down on our HOA fees or spend the money." Note this is second-hand info on what the accountant said. B/4 we recommend getting rid of this "incompetent accountant (CPA)", lets give her the benefit of the doubt and hear what she has to say "first-hand"!

RenaeW1
(South Carolina)

Posts:39

09/19/2008 8:41 AM
Posted By MaryA1 on 09/19/2008 4:56 AM Renae said: "Our bookkeeper checked with our accountant and she thinks that if we start this reserve account it will change our non-profit status. Does this sound correct? She is suggesting we go down on our HOA fees or spend the money." Note this is second-hand info on what the accountant said. B/4 we recommend getting rid of this "incompetent accountant (CPA)", lets give her the benefit of the doubt and hear what she has to say "first-hand"! You are correct that I did not speak to her directly. Last year we went on this same advice from the accountant and did not start a reserve account. I am asking for the reserve account to be started again this year and needed correct information because I felt last year I couldn't push the issue because after all, she was the accountant and I have no accounting background. So if we keep going on this advice from this accountant, we will NEVER have a reserve account. I need concrete evidence and advice to share with the other board members because they are likely to go with what our accountant says and not just a lay person like myself.

MaryA1
(Arizona)

Posts:2248

09/19/2008 9:33 AM
Renae, OK, so now we've established the fact that this info did, indeed, come from your accountant. I would approach the board and inform them that you've spoken to other board members of other assn's and they all state this advice is incorrect, therefore you would like to contact another accountant to verify. Explain the purpose for the reserve account and the importance of maintaining one. Also, I would suggest finding a CPA (not just an accountant) who handles HOAs to do your taxes.

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