Reserves and interest earned

Beth,

Welcome to the forum.

Your Reserve Study should be telling you how much money you need to put aside each year to properly fund the Reserve Fund. It's based on how much money is already in the fund, the current life expectancy of your common area elements and the expected costs of planned repairs/maintenance and replacement.

Here is a link to a thread on this forum on Reserve Studies. This should provide additional information for you.

Is your study done by an outside firm or internally by the board or membership?

As for interest earned, as long as it's being used for the Association you will be fine. Typically, when you determine your annual assessments, you add up your expected annual expenses plus the amount needed to be set aside for the Reserves, subtract the expected amount of interest you will earn and then divide that answer by the number of units to see what the assessment should be per unit.

Hope this helps,

Tim

While not a CPA nor a tax expert, my experience says a not for profit organization can carry forward money (including interest) and not pay taxes on such if the money is earmarked for future, expected maintenance.

Like carry forward money and interest paid on it if designated for say roof replacements in 20 years.

Of course I could be wrong and I am suggesting such only as a "method" to be explored.

TIM

An allied story. For some 20 years I used the same CPA for my business/personal taxes. I sold the business years ago and I still use him for my personal taxes.

I also had a personal friend that was a CPA and more then once we got into a discussion about business taxes primarily concerning deductions. He said I was wrong. I replied that while not a CPA, I was basing my "belief" on what my CPA had done for me over the last 20 years.

After several discussions over a long period of time, I showed my CPA friend a few of my tax returns. After looking at them he said he understood how/what my CPA did, but he would not "be comfortable" doing what my CPA had done. He admitted that had he been my CPA, my tax liability would have been much higher.

Main difference we arrived at (and not sure my CPA friend totally agreed with) was my CPA specialized in small businesses while my CPA friend specialized in large businesses.

I knew a fellow that was born into and brought up in the mens's clothing store business. He later became a CPA and made a very, very good living specializing as a CPA in the men's clothing store business. He used to say he knew where the skeltons were buried in that business.

Moral of the story? Is if you are a not for profit organization, then get a CPA that specializes in not for profit organizations verus just any CPA.

Now if you are in the men's clothing businees... have I got a name for you.....LOL

Bruce,

Your right, my error.

It should be form 1120 or 1120H

Tim

No. The interest earned on an HOA's deposits is not sheltered as it is on certain other deposits like retirement accounts. The tax on the interest must be paid as it is earned (tax on interest paid in 2011 must be paid when filing 2011 income taxes).

By the way, it may be advantageous to file 1120 instead of 1120H. Taxable income is taxed at a straight 15% when filing 1120H, whereas an an 1120 might result in a lower rate if the non-exempt function income is high. Compute the taxes using both forms and file the one that results in the lowest tax. An HOA makes an election to use 1120H instead of 1120 each year, so it's perfectly legal to do this.

For many HOAs the income received from dues (which is exempt function income) is the largest income they receive, whereas non-exempt function income (interest on deposits, money received from outside sources, if any, specific use fees, such as clubhouse rental, etc.) is often quite small, so the 60/40 income test is never a problem. Also, often well over 90% of their expenses are related to maintaining association property (lawn care, landscaping, snow removal, trash pickup, insurance, management costs, etc.). In that case, by filing 1120H all exempt function is non taxable. Although non-exempt function income is taxed at 15%, some HOAs are left with little or no income to be taxed after taking the standard deduction.

However, in some cases, where non-exempt income may be high, it may be more advantageous to file 1120 instead. In this case, ALL income is taxed after deductions, but it may be taxed at a lower rate which could result in a lower tax. You don't really know until you try it both ways with actual numbers. Even with personal taxes there is often no rule of thumb that can be used for all cases. Sometimes you just have to prepare the return a couple of ways to see which way results in the lower tax.