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Subject: Definition of "separate accounts'

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SusanW1
(Michigan)

Posts:1540

07/03/2008 6:14 AM
Here's a question: does keeping "separate accounts" mean it literally? Can all the money be in one large pool or even combined in accounts, but the REPORTING or ACCOUNTING of the funds have their own reports? Are separate checking accounts required for reserve and general activiites? What is everyone doing?

GeraldT4

Posts:909

07/03/2008 7:08 AM
SusanW1 - The portion of monthly maintenance that is allocated for reserves should be kept in an account that can earn the highest amount of interest, usually with the lowest amount of risk. Checking accounts don't normally receive high interest. The reserve account should not be commingled with other portions of money from the monthly maintenance. Another separate account should be working capital. I recommend hiring an accountant for the association.

DwightT
(Idaho)

Posts:342

07/03/2008 7:24 AM
Actually, I would like to know the answer also. Yes it SHOULD be kept in a separate account that earns more interest, but MUST it be kept separate? Maybe it comes from reading too many engineering documents, but SHOULD and MUST have completely separate meanings to me.

KirkW1
(Texas)

Posts:685

07/04/2008 5:56 PM
Please don't depend on this for legal advice, but in general bookkeeping terms it is common to have funds in a single bank account that are treated as separate accounts. Now if your documents call for "separate bank accounts" you need to have just that. Having said that, it would be wise if you have a reserve fund of any size to put that fund in a higher yield account then what you can get from more liquid accounts. But in your highest yield accounts you will have limitations in your ability to withdraw without penalty.

MaryA1
(Arizona)

Posts:1562

07/05/2008 8:59 AM
Kirk, It depends upon how you define "accounts". Where's Bill Clinton when we need him? LOL Seriously, by accounts, do we mean bookkeeping accounts or bank accounts? If we're talking about bookkeeing accounts, the answer is "yes". You can have the funds from two separate bookkeeping accounts deposited in one bank account. However, with regard to her second question: "Are separate checking accounts required for reserves and general activities?" it's apparent she's talking about bank accounts. Checking accounts? -- I would say "no". Bank accounts? -- I would say "yes". If only for the simple reason of wanting to get the highest rate of interest as possible on the reserve fund, in which case a money market fund would be preferrable. Does the IRS require separate banking accounts? That's a good question! I've been trying to research this but have come up against a blank wall. I cannot find a revenue ruling pertaining to reserve funds, or what the IRS specifically refers to as "sinking funds". There is nothing in Sec. 528 about reserves; there is nothing in the instructions for Form 1120-H (the tax form specific to HOAs) about reporting reserve funds; nor is there anything about reporting reserve funds in the instructions for Form 1120 (the corp tax return). Bottom line: It would be financially prudent to deposit the reserve funds in a separate bank account (preferrably a money market account) and it certainly wouldn't hurt in case there is an IRS rev. ruling requiring it.

JohnK3
(Pennsylvania)

Posts:243

07/05/2008 9:49 AM
We have, as others have described, two bank accounts, one checking account for income and expenses, one CD for our reserves, though our ByLaws probably require only one, with a bookkeeping entry as to how much is dedicated to each function. But as a practical matter, having two makes things much simpler and orderly, and makes for easier spot checks on our financial health, which thankfully is good. In fact, we're thinking of establishing a third, dedicated to an Insurance Policy Deductible fund = $1,000 fron this year's budget overage (which we would otherwise place into our reserve account), plus an additional $1,000 specifically budgeted for same in 2009. Why go to the trouble? For the same reasons above, plus it helps demonstrate to our constituents that we are looking after their welfare by planning to insure they won't get socked with a special assesment should a claim situation arise.

JohnM3
(Florida)

Posts:208

07/05/2008 1:55 PM
We have 2 seperate accounts with our Bank 1 for Operating 1 labeled savings ( Reserves ) Period. Its your hoa run it according to what your particular state laws say. Never ever forget you must have a monthly Treasurers Report in writing of the status of the Budget versus reality and account starting and ending balances. Good Luck Treas fo 12 years so far!

BruceF1
(Connecticut)

Posts:499

07/05/2008 2:45 PM
I would strongly urge two separate bank accounts. Aside from the benefits of keeping reserve funds in a separate interest-bearing account, having two separate bank accounts helps to eliminate any perception of impropriety. It's very easy to be accused of some sort of hanky-panky when you comingle the funds, even if your books show two separate accounts. It's much more difficult to accuse someone of any wrongdoing with two separate bank accounts. Remember, with two separate bank accounts, you automatically have an independent third party handling each account. I know when I ran my own business I was advised by my tax accountant that it was not wise to combine my business funds and my personal funds in the same bank account, but to keep them in separate bank accounts. I was also told the IRS prefers it that way and it was easier to prove things to the IRS if I was ever audited. (And, by the way, if you sustain a business loss, especially several years in a row, it's one of the things the IRS looks for to determine if you are really running a business or merely a hobby.) Although there may not be any laws against keeping the funds in the same bank account, it's possible that, if the HOA were ever audited by the IRS, it could make things very difficult. So, my advice is to "play it safe." Maintain two separate bank accounts.

KirkW1
(Texas)

Posts:685

07/07/2008 8:10 PM
Mary, The thing is that I spoke about this issue with my mom who was a bookkeeper for years and lacked only a couple of semesters from her accounting degree. She asked if the documents stated "bank accounts" or "accounts." She agreed that a layman might assume bank accounts but felt anyone in accounting would not make the assumption. But we agreed that it would be best to try and maximize the return on the reserve fund and this often means having separate bank accounts. Certainly a separate bank account will give a higher level of trust to the membership. But if your reserve fund is just getting started, it could make financial sense to have a single bank account with separate bookkeeping accounts for a short period of time. Hopefully you are building a reserve account that is worth having invested in at least a money market account and will draw decent interest.

GlenL
(Ohio)

Posts:1223

07/07/2008 9:18 PM
In addition to the checking account used to pay the monthly expenses and a petty cash account for emergencies. We have a money market account and we have multiple CD's at various banks for reserves. When we get close to the FDIC limit we stop depositing at that bank and move on to another bank. The CD's are structured so that several come due every month so if we need to get to them we can without a penalty. When large dollar projects are necessary we start not renewing them or move them into a monthly CD. Keeping separate physical accounts besides being prudent and for all the reasons noted by others makes it easier to find errors if for some reason there is a discrepancy between your books and the banks accounting than if it's all sitting in one big pot.

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