Architure Fees: Professional Expense or Capital Item

Started by CarolP16 • 9 replies • 1202 views

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CarolP16 (Arizona)
Posts: 7

Posted:

Our HOA has for past 10 years been developing the property...building major capital projects. Originally we "expensed" the architural fees. But after replacing our accountant the new accountant claimed these fees needed to be consider a capital item...even though we often were gathering costs of a project that may have been rejected due to its high cost or other reasons. Our problem is that our Condo ByLaws limit how much a board can spend out of condo fees for an capital improvement. The architectural fees are eating up that limit so that small project capital items such as handy cap ramps, moving a wall in a building, etc. are having to be rejected so that we can explore major project options. I do not believe the accounting theory this accountant is using. I believe the architectural fees become a capital item when the project expense is recognized (completed). If the project is never complete the architectural fees shoud be expensed as professional fees. I have an MBA in finance and was a CPA but no longer have access to accounting rules. Can anyone speak to this accounting problem?

TimB4 (Tennessee)
Posts: 21,059

Posted:

Building new or changing existing buildings or amenities are, in my opinion, a capital expense.
Doing research, having drawings made, having legal expenses or permit charges would, in my opinion, also be a capital expense.

I would also caution against rejecting building handicap ramps over exploring larger projects.
This gives me an indication that priorities may be misaligned.

CarolP16 (Arizona)
Posts: 7

Posted:

Tim...I agreee those are capital items to be recognized on the books when the project is capitalized...but the question is WHEN. If the expenses to determine if project is feasible never become a capital item in reality then I would contend they are legit "expense" (professional fees) items in the current budget. When we don't know for another budget year if the expenses will qualify as capital items we should catagorize them as expense in the current budget year that they occur.

Thank you for responding so quickly.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Quote:

Posted By CarolP16 on 09/06/2016 3:45 PM
Tim...I agreee those are capital items to be recognized on the books when the project is capitalized...but the question is WHEN.

Sorry, I thought I that the way I worded my response, it was understood.

They are considered capital expenditures when the expenses are incurred, regardless if the actual project is completed or not.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Carol,

Keep in mind that an HOA/COA is not a typical business.
Capitalizing costs to spread out expenses of a project isn't needed for Associations who utilize IRS form 1120-H. If you are filing form 1120, then you may or may not benefit from capitalizing costs.

The problem is that it appears your Board isn't trying to spread out expenses for tax purposes. You are trying to circumvent your Bylaws with accounting methods. If ever challenged by a member, there may be a lot of explaining to do if the issue goes through the courts. This is likely why your CPA gave the Board that opinion.

It would be best if the Board would work to amend the Bylaws to allow for more capital improvement or to access a special assessment for capital improvement expenses or, perhaps, simply slow down on the improvements (which is likely the reason for the limitations within the Bylaws).

RichardP13 (California)
Posts: 3,868

Posted:

Carol

Any chance your community is still under developer control, even after 10 years?

CarolP16 (Arizona)
Posts: 7

Posted:

response to RichardP...no property is not under developer control...Ours has been a condo with homeowner control since 1972. But the over 55 year population residents has younger people moving in who want the aged facilities updated and more facilities added.

Tim has a point...maybe we need to slow down on the desire for improvements.

Our "by-laws" in AZ require 67% of membership approval. The increase on the limit on annual capital expenditures was up for a vote and was rejected. But the vote was taken before the new accountant said we had to treat professional fees under the "limited capital expenditure for a budget period". Prior to the vote I spoke strongly against raising the limit insisting that significant capital improvements should come from assessments that all owners voted on, not just by decision of an 8 member board.

Tim you seem to know what you are talking about regarding the accounting for those dollars. Wish I knew you background/training. Guess I will stop fighting with our accountant and start petitioning for new vote on the "capital item limit".

RichardP13 (California)
Posts: 3,868

Posted:

Carol

Homeowner association finances are a different beast from what generally goes on in the corporate world. I have had many CPA struggle with their finances as long as I have been in this business. I look at Annual Reviews and Audits performed by CPA and the numbers are difficult to match with an association's year end statement. Two things throw them and those are associations don't depreciate assets, nor do they pay dividends to shareholders.

Being you're in Arizona and in (maybe) a former 55+ community, that may have let the kids come back, that now wants to bring into the 21st Century. I guess they aren't into shuffleboard. I am guessing it might be a larger community, maybe 500 homes, that have lots of money.

I don't know what the rules are for adding capital improvements in your state. I know what they are in California and how to properly work within the system to get things done. If the Arch Fees are of a substantial amount, I like to expense that in with reserves, one, because they are mainly for items that I presume are already in there, and second, I feel tighter monetary controls can be placed on that money so it doesn't get "accidentally" spent on the wrong items.

In California, we have a 5% rule for capital expenditures. Anything over that has to be approved by the owners per the governing documents.

As far as the tax implication, I prepare a number of 1120-H for smaller association, but as I am not a CPA, I stay far away when it comes to the 1120's. I prepare annual reviews for HOA's whose revenue is at $75K or under, but because of state statues, leave the others to the guys making the big bucks.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Quote:

Posted By CarolP16 on 09/07/2016 5:57 PM

Tim you seem to know what you are talking about regarding the accounting for those dollars. Wish I knew you background/training.

I am not a CPA. I was majoring in Accounting in college before I realized I didn't want to be stuck behind a desk. Perhaps this gives me a little better insight.

Quote:

Posted By CarolP16 on 09/07/2016 5:57 PM

The increase on the limit on annual capital expenditures was up for a vote and was rejected. . . . Prior to the vote I spoke strongly against raising the limit insisting that significant capital improvements should come from assessments that all owners voted on, not just by decision of an 8 member board.

Carol,

I was in a similar situation. Our Board asked for an increase in assessments to fund the reserves. I spoke against it because I felt the Board didn't do their homework. Well, I was elected to the Board that year and the Board did their homework. I was then in the position of arguing for an increase in assessments (which I argued against just a year earlier).

Use that to your advantage. Identify the reasons why the increase is needed and share the homework that was done. This is what I did and we successfully increased assessments by 20%.

CarolP16 (Arizona)
Posts: 7

Posted:

Tim,
Thanks for all the insight and experience you have shared. Hope others can gain insight to the issues condo board face.

Good luck.
Carol

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