Potential Surplus ?

Hi everyone!

Our previous management company did not file taxes for the previous year

After further reviewing our Balance Sheet & P&L it seems that we have a "Surplus"

Example Below:
We Budgeted 82K of expenses, but we ended with a net operating income of $15,246.83
Part of it was also because we obtain unpaid funds from various owner

We are also in the process of choosing the correct firm to file our taxes.( Open to recomendations)
Assuming indeed this is a Surplus, We did not vote last year on how to use these funds
Right now the funds are still in our operating account (The amount actually equals 3 months of our current budget)

I am just confused on how to move forward since we are already in August and I would like to avoid paying any taxes on this "surplus"
Eventually we will need to include the community to vote on what to do next?

From our By Laws
" Any Surplus assessment collected may be allocated to next year's operating cost or to the creation of reserves, whether or not budgeted. Under no Circumstance shall association be required to pay surplus assessment to owners"

Any feedback would be great

Thank you

Are you on the Board, Carlos? How well-funded ARE your reserves?

Not Well Funded at all... We have only had a reserve for 2 years since I started on the board (The community has been opened since 2013)

well that's normal because reserves should be buildt up over time. if you need $100K in 10 years that means about $10K saved each year, not $100K saved ASAP. but the only way to know is if you do a reserve study there are free ones that are actually pretty decent online.

Carlos

You said:

From our By Laws
" Any Surplus assessment collected may be allocated to next year's operating cost or to the creation of reserves, whether or not budgeted. Under no Circumstance shall association be required to pay surplus assessment to owners"

Is this not clear?

Carlos,

John is illustrating what you can do with your surplus. He is quoting exactly from your own docs. Your question is the tax implications. If you want you can verify Douglass assertion on IRS tax code. He is correct if you qualify for the 1120-H. You will have to see if you qualify. Here might be some requirements for 1120H. Don't rely on this cut and paste as being accurate. You will need to get into the weeds.

"The requirements are that:

60% of HOA’s annual revenue must fall under exempt-function income, meaning that they are generated from owners who are members and not as customers.
HOAs should also ensure that 90% of its expenditure is on capital expenditure, maintenance, and management expenses.
The units within the community should mostly be used as residences, more than 85%.
Annual residual income must not be used to benefit association members.
If a homeowner association qualifies to file Form 1120 – H, then they will only be taxed on the non-exempt income. The non-exempt income is generated through interests from banks and other reserves, and other for-profit activities, such as renting out a clubhouse, the vending/laundry machine income or golf-course fees.

Expenses used solely to generate the non-exempt income are then deducted; records to support these expenses should be available. Homeowners associations are allowed a $100 deduction on taxable income, and a flat rate of 30% applied."

Credit back to owners does not look like an option. I do not know why it was stated.

Carlos,

Our board simply adopted a written policy that any excess funds (typically due to expenses being less than budget amount) would be placed in the reserves.
This satisfied any vote requirement.

I think you would be surprised at the number of reserve components once a good look is done. Often overlooked items: Signage, minor playground equipment (trash cans, benches, etc.), storm water management, landscape replacement costs (life of trees, bushes, etc.).