Does Having a Reserve Fund Change Tax Status

This is absolutely wrong as far as the federal Internal Revenue Service is concerned. Period. End of discussion. It sounds to me that your accountant is unfamiliar with tax laws. Change accountants now.

Now, with that said, any investment income or interest your association receives as a result of investing the reserve fund is reportable and taxable. But don sweat it. You probably have to file an association tax return every year anyway, so paying the corporate tax is no big deal. Just do it and don't worry about it.

For your own information read the instructions from the 1120-H. They are not difficult to understand.

http://www.irs.gov/pub/irs-pdf/f1120h.pdf

Reserve funds are quite common and mandated in some states. Get one started soon by contracting for a reserve fund study.

RenaeW1 - Interesting, HeatherJ is also from South Carolina, has signs in the front but she says there are no amenities. Are you both from the same association? Yes, or no? Read my post to Heather re: Calculating Reserve Fund.

Reserve Funds are a necessary component, and requirement when there are common elements that need to be eventually replaced (pool, signs, etc.) The description of the common elements are in your governing documents, or should be. There is no IF you start a reserve account, only a WHEN, and WHY haven't you started one. Your board members may be held guilty if one isn't started. The date of construction of the common element will also need to be established because the clock for reserve fund transfers has already begun, you are behind the 8 ball in reserve transfers. Meaning if the date of construction of the common element was say Sept. of 2006, the common element is now 2 years old. If the element has a 15 year life-span, and the cost of construction of the common element is $3,000.00, you missed two years of funding that needs to be made up, otherwise you will have a shortfall when the element needs to be replaced. Weather owners like it or not, they have a responsibility to the association to pay it forward, even though they may not be living in the association in say 15 years when the element needs to be replaced. Often the reason why many board members and owners are stingy when it comes to funding reserves. They figure, "I won't be living here in another 5 years so why should I care about it now". The answer to that is caring isn't a choice, it's an obligation, and more often than that it's the Law.

Renae,

I believe the money deposited in the reserve account is not an expense, rather it's shown as a decrease (credit) in the income portion of the balance sheet. What this requirement means is that 90% of the assn's expenses must fall into the categories listed.

Yes.

This is the way I understand it.

That's 90% of the EXPENSES must be in those category.

It doesn't say that 90% of the REVENUE is to be used for expenses.

If you have spent $100 and at least $90 of those expense dollars went to upkeep and maintenance, then you're okay. If you spent $100 and only $60 of those expenses went to upkeep, and $40 went to gifts, you would have problems.

But if you collected $500 that year, but only spent $100, and at least $90 of that money expended was for upkeep and maintenance, and the $400 just stayed in the bank, you're okay.

"I might add that when filing the fed. tax form 1120H (specific to HOAs) there is an automatic $100 credit on the tax due."

Sorry, Mary not correct again.

It is a $100 deduction from gross income on line 18. It is not a tax credit from line 21. It is clearly shown on the 1120-H as a deduction.

There is a big difference between a deduction and a credit. You are taking a deduction from income, not from the taxes you owe.

Please be more careful in your postings.

George,

Sorry, I misquoted that. I'm slapping myself because I should know better! :-(

A reserve account is not income. Having a reserve account does not change your non-profit status. You need a new accountant. Lots of accountants think they can get into the HOA business and crash and burn. There are lots of special rules around HOA accounting and if you don't know them you can get into big trouble. Your accuntant not only does not understand HOA accounting, but she doesn't understand non-profit funding either.

Assessments are the money that you take in to manage your HOA. In California, you are required to have a reserve account against future replacement/repairs of common property. The only income that is taxable is the interest on your Reserve Account. That does not jeopardize your non-profit status, it just means that by federal law, the interest you earn on your reserve account is not exempt from taxation. Paying tax on your interest is a good thing, since it means you have a healthy Reserve Account. I would suggest that you contact your local Community Association Institute chapter and find a competent CPA.

Renae said: "Our bookkeeper checked with our accountant and she thinks that if we start this reserve account it will change our non-profit status. Does this sound correct? She is suggesting we go down on our HOA fees or spend the money." Note this is second-hand info on what the accountant said. B/4 we recommend getting rid of this "incompetent accountant (CPA)", lets give her the benefit of the doubt and hear what she has to say "first-hand"!

Renae,

OK, so now we've established the fact that this info did, indeed, come from your accountant. I would approach the board and inform them that you've spoken to other board members of other assn's and they all state this advice is incorrect, therefore you would like to contact another accountant to verify. Explain the purpose for the reserve account and the importance of maintaining one. Also, I would suggest finding a CPA (not just an accountant) who handles HOAs to do your taxes.