Interest calculation

Our documents state that 18% per annum can be charged on late assessments. There is no stipulation whether the calculation is to be for simple or compounded interest. Which would it be in this case? Thanks

If it doesnt state, it could be either. If you are being charged compound interest, then its compound interest. If you are the treasurer, then you decide which one it is.

Quite simply if you start charging compound interest you will likely be violating both state and federal law. But hey, if you want to try to land your association on the news feeder at that we get that is your business.

Steve,

Do you have some reference upon which to base your statement that there is no law prohibiting compounding interest?

Steve & Kirk,

Copied below is an AZ statute 42-1123 which says interest is compounded annually. And below that is an IRS bulletin which states interest is compunded daily. I think this proves it IS legal to compound interest. However, whether an HOA board should compound interest or not should be determined by what their CCRs say. Mine only say interst may be charged at a rate not to exceed 12%, so I guess the board could use the state law which allows yearly compounding. IMO, charging interest is really "nickle & diming" -- not worth the trouble for the small return.

42-1123. Interest

A. If it is provided by law that interest applies as determined pursuant to this section, the department shall apply interest, compounded annually, in the same manner and at the same times as prescribed by section 6621 of the United States internal revenue code, except that the rate of interest for both overpayments and underpayments for all taxpayers is the federal short-term rate, determined pursuant to section 6621(b) of the internal revenue code, plus three percentage points.

IRS ANNOUNCES QUARTERLY INTEREST RATES
Washington -- The Internal Revenue Service today announced that
interest rates for the calendar quarter beginning April 1, 1998, will
be seven (7) percent for overpayments, eight (8) percent for
underpayments, and ten (10) percent for large corporate underpayments.
The overpayment rate for the portion of a corporate overpayment
exceeding $10,000 will be five and one-half (5.5) percent.
Under the Internal Revenue Code, the rate of interest is
determined on a quarterly basis, the rate on underpayments is one (1)
percent higher than the rate on overpayments, and the rate for large
corporate underpayments is two (2) percent higher than the rate on
underpayments. The interest paid on the portion of a corporate
overpayment of tax exceeding $10,000 for a taxable period is the sum of
the federal short-term rate plus one-half (0.5) of a percentage point.
The interest rates announced today are computed from the federal shortterm
rate based on daily compounding determined during January 1998.
Rev. Rul. 98-17, announcing the new rates of interest, is attached
and will appear in Internal Revenue Bulletin No. 998-13, dated
March 30, 1998.

ARS42-1123 is an AZ statute and, as you can see, interest is compounded yearly.