The Function of Fines and Where to Deposit Them

Started by DeniseS8 • 14 replies • 403 views

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DeniseS8 (Colorado)
Posts: 4

Posted:

I'm wondering about the fines that an HOA collects due to covenant violations. Do these amounts go into the operating account of an HOA? Are they counted as revenue?

If my HOA earned $10,000 in fines this year and that resulted in a budget surplus, would that mean $10,000 should be refunded to members? Or does this amount just stay in the bank account?

MelissaP1 (Alabama)
Posts: 13,836

Posted:

This is NOT something your HOA "Earned". It EARNS Dues. It does not EARN Fines. Fines are PUNITVIE. They are NOT part of an HOA's income stream. So a HOA should not be dependent nor factor them into their budget. With that being said, your HOA could be courting some tax ramifications. Basically collecting outside of Dues or Special assessments can appear as "profit". Considering an HOA is a "not for Profit" non-charitable incorporation, this can look like "profit".

Fines are to work like "speeding tickets". They are to be put into place to correct violations by causing repecussions. IF your HOA is treating them like another way to collect income, your HOA is going to be in some deep do-doo eventually.

Former HOA President

MichaelT21 (Arkansas)
Posts: 501

Posted:

First of all, ignore Melissa. You're new here and I don't want you to be led astray.

Fines are deposited to the operating account of the HOA, just like dues and delinquent fees.

Most HOAs do not return a surplus back to homeowners. Rather, the surplus is carried over until the next year. The fine revenue can be spent on the community, or if no community spending is necessary, it can be used to lower dues in the future.

Likely, your association will have to pay a little bit of taxes to the IRS on the fine revenue collected (ours does). While the dues (regular assessment) revenue is often non-taxable due to the association nonprofit status, often the delinquent fees and fine revenue is taxable.

JohnT38 (South Carolina)
Posts: 1,631

Posted:

Quote:

Posted By MichaelT21 on 06/28/2022 5:40 AM
First of all, ignore Melissa. You're new here and I don't want you to be led astray.

Fines are deposited to the operating account of the HOA, just like dues and delinquent fees.

Most HOAs do not return a surplus back to homeowners. Rather, the surplus is carried over until the next year. The fine revenue can be spent on the community, or if no community spending is necessary, it can be used to lower dues in the future.

Likely, your association will have to pay a little bit of taxes to the IRS on the fine revenue collected (ours does). While the dues (regular assessment) revenue is often non-taxable due to the association nonprofit status, often the delinquent fees and fine revenue is taxable.

Wise advice.

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By MelissaP1 on 06/28/2022 4:13 AM
This is NOT something your HOA "Earned". It EARNS Dues. It does not EARN Fines. Fines are PUNITVIE. They are NOT part of an HOA's income stream. So a HOA should not be dependent nor factor them into their budget. With that being said, your HOA could be courting some tax ramifications. Basically collecting outside of Dues or Special assessments can appear as "profit". Considering an HOA is a "not for Profit" non-charitable incorporation, this can look like "profit".

Fines are to work like "speeding tickets". They are to be put into place to correct violations by causing repecussions. IF your HOA is treating them like another way to collect income, your HOA is going to be in some deep do-doo eventually.

Can you explain the exact accounting procedures that would allow an HOA to demonstrate that revenue from fines is being handled differently than revenue from assessments? Is there a special kind of bank account for fines? Do the expenses the HOA incurs in order to collect those fines get paid out of that bank account instead of the primary bank account?

As a member of my HOA's finance committee, I need to see what we need to do differently than we are currently doing in order to avoid "deep do-doo." I am also curious what that deep do-doo might be.

MarkR21 (North Carolina)
Posts: 710

Posted:

$10,000 in fines holy shiiiit!
Reminds me of the police dept in the south that basically Funded their entire department by using tickets given to out of towners they even had a couple of armored vehicles for a town with a few thousand people

My HOA has a few hundred in fines and refunds 75% Of the money back if the violation is corrected I suggest you get a fines policy asap that spells out all of this there’s a good YouTube video that details this from the Scottsdale Arizona YouTube channel

BillH10 (Texas)
Posts: 1,217

Posted:

Denise . . . and David

I recommend you consult with the association CPA and attorney as they should be familiar with the various laws, codes, and accounting procedures which pertain to your question(s).

MelissaP1 (Alabama)
Posts: 13,836

Posted:

Funny tells people to ignore my advice and then states my advice...

Fines can be subject to taxation because they are not dues or special assessment collections. They go into the operating budget. However, when you have to show collections based one dues collected per each unit versus the extra from fines, that is going to show a profit. It is not going to compensate the difference between unpaid dues.

It will be a line of its own on collecting. It will not be part of the income collected by dues. I would consult an accountant or CPA on this

Former HOA President

SheliaH (Indiana)
Posts: 6,964

Posted:

You can’t and shouldn’t depend on fines for association revenue because people should be complying with the rules anyway.

I agree with Bill – talk to your association attorney and accountant about this because there COULD be tax implications. I’m not an accountant, but you might be able to consider them part of miscellaneous income because that can come from a variety of sources, such as an insurance payout. For budgeting, you could set that number as zero and add the money as it comes in, and then it would get dumped into the general fund.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By DeniseS8 on 06/28/2022 2:59 AM
I'm wondering about the fines that an HOA collects due to covenant violations. Do these amounts go into the operating account of an HOA? Are they counted as revenue?

If my HOA earned $10,000 in fines this year and that resulted in a budget surplus, would that mean $10,000 should be refunded to members? Or does this amount just stay in the bank account?

Denise

First, it does go into your operating fund. If, as Michael says, the IRS considers fines to be taxable income, the only accounting consideration is that it will need to be included on your 1120 (or 1120-h) when you file taxes. Assuming there is cost associated with collecting the fines (management, collection letters, etc) those can be used to offset the taxable income. However, you absolutely need to have an accountant to do all of this for you.

As far as a surplus, if your HOA has a surplus at the end of the year, Colorado law says you must refund it to the owners or credit it to them to offset their future assessments. I have heard various opinions on whether there are other options. As it turns out, I was recently named to the Finance Committee on my HOA, and Delaware law reads the same as Colorado's. Last year we had a surplus of $120,000 and I need to find out what our options are. So I will probably be posting on this subject in the future.

Note that there is absolutely nothing wrong with an HOA having a surplus. Most HOA revenue (assessments, fees, etc.) is considered non-taxable, and so there are no tax issues and your non-profit status is not affected. The questions are a)what can you do with the surplus, and b)identifying what revenue is taxable so you can pay the correct tax on it.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Concerning excess funds in the operating account at the end of the year (I don't call it surplus, it was simply under spent what was budgeted):

We deposited the excess funds into our reserves.
This was done on the advice of our CPA.
Additionally, on that advice, we created a policy resolution to identify what to do with excess funds.

MarkR21 (North Carolina)
Posts: 710

Posted:

Quote:

Posted By TimB4 on 06/28/2022 2:30 PM
Concerning excess funds in the operating account at the end of the year (I don't call it surplus, it was simply under spent what was budgeted):

We deposited the excess funds into our reserves.
This was done on the advice of our CPA.
Additionally, on that advice, we created a policy resolution to identify what to do with excess funds.

That’s a good idea can you copy and paste the main points of such a resolution please?

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Quick clarification: you can put the surplus into reserves in TN, because you are not obligated to give it back. The OP’s board is not able to do that legally.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Mark,

I could not find the resolution (may have deleted it as I've been going through files), but I will keep looking.
I did find an article from a CPA that addresses excess funds we used to help adopt the policy. It can still be found on the internet:

IRS RULING 70-604

Additionally, here is some more info from the net:

Operating Surpluses: What You Need To Know 2017 article from CPA firm

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DeniseS8 (Colorado)
Posts: 4

Posted:

Thank you all so much for your advice!

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