Surplus Earnimgs YE , what is done with $$

Calif Hoa has had surplus earnings of $20,000 and $10,000 for the last 2 years.
This money is in the Ops Checking account.

This week they say are reserves are short, vwey close to the money in the Ops checking.

Can the Surplus just sit in the Ops checking? Why ca't it be applied to the Reserve?
CA HOA

Tim,

I do not think this statement is correct. On the advice of our auditor several years ago, we have accumulated an "operating contingency" representing 20% of our annual assessments. This was accomplished by budgeting expenses less than planned income over several years. None of these "surplus" operating funds were transferred to reserves and no tax liability resulted. In 2009/2010 this operating contingency allowed us to cover huge snow removal costs from two 20"+ snow storms without having to resort to a special assessment.

Also, as a result of finding much more cost efficient ways to operate the association since transitioning from declarant control 3 years ago we have kept assessments the same and have accumulated additional surplus funds. We are in the process of transferring these funds to a separate "Capital Improvement Fund". Again, these surplus operating funds have created no tax liability other than the tax on the interest earned on their investment (in CD's and money market accounts.

It could be a hundred reasons. Have you asked the HOA what is going on and why?

It depends on what your CC&R's or applicable state law requires or allows. Up until Ohio changed the law allowing COA's to move excess funds to reserves, our CC&R's required that it be returned to the homeowners in the form of lowered assessments.

This is not necessarily correct.

If the HOA files 1120-H and if the "extra" income is from exempt function income (assessments) it is not taxable, no matter whether it is placed in a reserve account or remains in the operating account. Exempt function income is just not taxable when filing 1120-H, period. Exempt income means that it is income exempt from taxes. By transferring the money from an operating account to a reserve account you might be thinking in terms of it being an "expense" to the operating account, but, bottom line, it is not an expense to the HOA (or for tax purposes). All of this can be difficult to understand because we are accustomed to thinking in terms of how a regular business is taxed. I know it took me a while to grasp.

If the HOA files 1120, then the extra income represents profit and is taxable, unless it is called a "capital contribution" and is placed in a separate "capital account" (not a reserve account). This all requires extra and more careful bookkeeping and accounting. Furthermore, money in the capital account can only be used for capital expenses. Remember the painting discussion awhile back? Periodic painting is not a capital expense and therefore cannot be paid for with money from a capital account without taxable consequences. However, painting can be paid for from a reserve account without any taxable consequences if the HOA has been filing 1120-H.

It all comes down to how an HOA accounts for its money and files its tax returns.