Taxes on reserves

For those with decent reserve funds are you writing a check to IRS each year to pay taxes on your interest? Our CPA prepares our tax returns and claims our entire management fees and all CPA fees as other deductions which wipes out any tax liability. With today's low interest rates we would need millions in reserves to earn more interest than our professional fees. I feel like I have seen other posts here where people are paying taxes but wanted to check. Thanks

We would file Form 1120-H and pay taxes on $25,000+ of reserve interest, so at 15% tax, we were netting about $21,500. Some years the interest amount was higher.

The other issue would be if you had excess revenue after expenses. I managed associations that carried over $100K of excess revenue and were taxed on it.

If you had about $100K in reserves and used a zero-based budget, any reserve interest would be eliminated by allowable exemptions.

We file an 1120-H

Management costs ARE part of the expenses of an association, such as landscaping, which also, does not produce income.

Issue isn't whether MC costs produce income.

Issue is whether MC costs can be allocated to taxable income.

Example: HOA rents out clubhouse to outside groups. If MC manages that function, then some portion of MC costs could be legitimately expensed.

My understanding of 1120-H is that non-exempt income (such as interest) can only be offset by expenses related to the generation of that income. So if you rent the clubhouse, you can deduct cleaning, management, or any other expenses that were related to generating the rental income. Unless the MC and CPA are helping manage your investments and contributing to the generation of the interest, I wouldn't expect you to be able to deduct those expenses against the interest income.

To return to what the OP asked, to my knowledge, there is no deduction for producing the interest on a reserve account.

On the 1120-H, line B is for total exempt function income that meets the 60% gross income test, line C is for total expenditures made for purposes described in the 90% expenditure test, and line D is for the Association total expenditures for the tax year.

Outside of a slim minority of HOA's, the Deductions part of the 1120-H (lines 9-18) would only be used for interest received, less a $100 credit.

The management fees, as well as other association expenses would be listed on Line 2.

For the HOA's that do have reserve accounts in excess of $500K, you may have to pay taxes, depending on how the monies are invested the the rate of return.

I prepare tax returns for associations that have income less than $75K. Any association in California with income over $75K must have an annual review performed by a CPA. They generally do the taxes for them as well, as part of a package.

Our tax CPA figures taxes two ways and we file so that we receive the best tax advantage. Sometimes we pay taxes on the interest earned. But the last couple of years, our CPA had us file on Association fees but with maintenance costs subtracted from the fees. We had no tax liability.

The year we cashed in our CD's to put in a money market account we had a huge tax liability and had to pay estimated taxes each quarter but we got all the money we paid to the IRS back the next year.