Too Much Money?

Our HOA has amassed nearly $200K in bank accounts, we had net profit of $54K in 2014. I'm the Treasurer (a volunteer, elected position) and have been told that if we exceed a certain amount of $, we will lose our tax-exempt status.

Is it sufficient to simply move $ from the operating account to a reserve account to eliminate this problem? (Our accountant suggested this)

Is there an advantage to giving back some $ to HOA members through a reduction of monthly fees for the new budget year? (some board members are against because the members have to vote for an increase if $ is needed later on)

Our annual budget is approx $300K. I'm not an accountant but I am responsible for creating the 2015 budget.

All thoughts are appreciated!
Bonita

Hi NanibF!

1. Regarding your net profit of $54,000.....does your operating budget contain an expense line item where money is deposited into your HOA reserve funds OR is this profit serving as the basis of what cash gets deposited into Reserves?

2. On an annual $300k operating budget, I'd argue (from this perspective) that you could follow your accountant's advice on shifting funds from operating to Reserves.

3. I would not recommend lowering dues rates. Instead, hold rates steady and inflation and maintenance costs will easily consume your abundant cash in the near-term years. Your board is correct on the difficulty of raising dues but ease of lowering rates.

4. Looking at my much smaller budget, I'd say you're likely okay with a $200,000 reserve fund and that the Reserves could continue growing. Yes, it's a lot of cash in the bank BUT your HOA has a large operating budget ($300k), which tells me you save big and you spend big (when expenses rise up and bite you). Your savings haven't reached 100% of your operational budget....you seem healthy.

5. Is your overall HOA property elements in the best operational condition, all things considered (especially age of amenity)?

- If your operations budgets includes reserve fund deposits AND you still have a $54,000 "profit," then reinvest the "profit" where it's needed in restoring your existing amenities to best-possible maintenance condition....but no new amenities or extra services.

- If leftover "profit" is what is used to boost Reserve Funds, then I'd resubmit the 2014 budget as your 2015 budget proposal except I'd create a Reserve Fund expense (in the operating budget) of $54,000, so that your extra money is saved for when it's needed (and it will be needed). In this manner, you'll save $54,000 in 12 monthly deposits. Your HOA will then not make a profit.

At some point, the Reserve Fund will be needed to fully replace worn out amenities like pool plaster, furniture and other things that HOA dues payers enjoy using but wear out relatively quickly. It will be advised on this board to hire a professional to give you a Reserve Fund Study. It's smart strategy if your board wants to spend the few thousand dollars to hire the experts....your HOA can afford it based on your feedback.

If you have serious professional concerns, consult the accountant more deeply. This forum offers, at best, on-the-ground feedback from volunteer board directors who aren't licensed. We are an educated Peanut Gallery.

I have never heard of an Association being tax exempt.
Although most Associations are incorporated as a non-profit, they typically are not a tax-exempt non-profit.

Associations typically file form 1120-H for their federal taxes.

What forms do you use to file taxes?
What is the bases (document) for believing the Association has a tax exempt status?

I'm concerned that you have 54K in excess funds. This indicates that you either had a special event (collection from insurance, collection of past due accounts, etc.), you have very good investments and it's dividend and interest earned, or that you have a very poorly done budget.


We always move extra funds (due to line items coming in under budget) to the Reserves.
Failure to do this would require that we either lower assessments (as we don't need as much each year)or we refund the excess.


Makes the members happy.
May have an impact on future assessments.


Budgets are relatively simple to do.

Identify the expected expenses (landscape contracts, reserve contributions, utilities, trash/recycling, etc.), the expected increases to those expenses and add them up. This tells you how much you need for the year. Then divide that amount by the number of your lots and this tells you the amount you need.

I've attached a copy of the budget prep I did for our Board, as it may better illustrate the process.

Hope it helps,

Tim

Is this what your association's CPA advised or just something someone told you?

Ignorant people with good intentions will get you into more trouble than a con-artist ever will. Smile politely and thank those who offer up their advice and then seek out a professional opinion. BTW, you have a fiduciary duty to the association and its members; you could become personally liable if the association suffers a loss due to following bad advice from an unqualified source. [Since I would be an unqualified person to offer up legal advice, please smile politely, thank me, and then go consult a professional.]

An alternative that we chose was to use the surplus funds to establish a "Capital Improvement Fund". We defined a capital improvement as an expenditure to create a new amenity for the community. Once the new amenity was established, the reserve study was updated to add the amenity to the reserve inventory for future replacement. Examples of uses of the fund were: drilling a well to augment irrigation water supplies, purchase of a specialized mower for steep hillsides in the community, and purchase of a tractor.

Took a few moments to click around the site.
The following looks like it should work:

Click on "My Account" (blue bar at the top of the page)
Click on "manage profile"

Tim,

I tried your suggestion - let's see if it works.

Dave

BobD4 was able to change his. Perhaps he will log on soon and share how he was able to accomplish that.

Bob,

Thanks, I'll try that method.

Dave

It worked! I am now listed as North Carolina.

Dave