Budget Surplus /HO credit

Our association is anticipating coming in roughly 2K under budget this year and our board is contemplating giving an HO credit to each member at the end of the year that will be deducted or prepaid against next year's annual dues (we don't intend to cut checks). We are a smaller association of 50+ homes, have an operating budget of around 20K with both a healthy operating and adequate capital replacement reserve account (in fact, our operating reserve is probably way too high right now due to some unanticipated refunds and revenue). We also anticipate our dues to be lower next year due to several new occupied homes in our community.

This has never been done in our community and was wondering if there's any advice for or against. Does anyone know if there are any significant tax implications for such a nominal amount?

Last year's Annual Budget was roughly 20K. Dues are yearly. A $40 credit against anticipated 2010 dues would be roughly a 10% savings to the HO.

We're in MI with super high unemployment. Those that still have jobs are on pay freezes or salary cutts ... don't think a party would fly ... website would be a good addition, but would have year-over-year cost. Certainly something to think about.

Unfortunately not. The only thing close is the guidelines for determining what the annual assessment should be.

The board of directors of the Association shall establish an annual budget in advance for each fiscal year and such budget shall project all expenses for
the forthcoming year which may be required for the proper operation, management and maintenance of the Condominium Project, including a reasonable allowance for contingencies and reserves.

I just sort of feel like we shouldn't be keeping the excess money if we met our contingencies and our reserves are healthy.

Thank you for including your clause ... it seems like a credit is an acceptable way to refund money (I wasn't sure if it was proper) if so desired.

What informed the decision to move the money to reserves instead? Did that reduce each owner's required annual contribution to that fund or is it just excess?

Mary

We are a site condo. I'm actually not sure which tax form we file.

Forgive my ignorance ... What is the "Rev ruling" from?

So, if we do 1120, we must vote to determine cash refund or credit? We were thinking the credit would be applied against the next year's credit, so that looks like it would be allowed following a vote?

If we do 1120H (which I'm thinking we don't, since we are site condo), it looks to me like we could refund ... because what we would be refunding would be excess assessment money?

Use the excess left over at year end for a project that effects the value of the entire Associations homes thus increaseing the value of every home. Thats what we have done for the past 21 years and so far we have built a parking lot (24 spaces ) a clubhouse, new monuments at both main entrances, re-landscaped both entrances, an updated our irragation system. Our members pay $125 a month with 307 units. We mow the grass front. rear and sides of all houses except those who wish to cut their own lawns we are in South Florida..
Just a suggestion we are 21 years old 3 lakes 1 pool 1 kiddie wading pool and our own securty 12 hours a day roving. In a crime rich area of Florida.....

Hi Roger:

The "unanticipated revenue" is mostly from receiving long awaited Developer Shared Expenses (2 years worth,Capital Contributions from new unit sales, and a refund of several thousand from "overpayments" to the MC and their affiliated service providers. This money all currently sits in our checking account. I was assuming if we pushed this to a reserve account, we would not need to pay taxes on it -- but haven't looked into it much.

The money that I would like to credit back to the HOs is simply from the fact that we collected more assessment from them than we actually needed to spend. It seems peculiar that we can't do this??? It resulted from things like we switched MC and it lowered our cost and snow removal was not as high as anticipated. We don't really want to lower dues as a result of this because it is sort of a fluke and we can not guarantee that it would be repeated next year.

According to our reserve study, the account is fully funded -- we have few common elements -- and we have stopped collecting for that.

Dee,

The developer shared expenses is the same as assessments and the overpayments to the MC would be a credit to that expense account and not an income transaction. I don't believe your taxable base would be affected, but, again you should check with your CPA.

Why risk loss of the ability to file the 1120H by refunding this net profit? I believe someone else stated it would only amount to $40/member anyhow. Filing the 1120H means only having to pay tax on interest earned on your reserve account (for most HOAs this is the only non-exempt function income), but filing the 1120 means paying tax on ALL your income, including assessment income.

I live in an association in California of 317 homes. For some reason, our PM waived our December dues of $146, which amounted to a reduction of $46,282. In addition, our water and sewer bills have been waived for two of the last three months. As part of the new budget for 2010, the board mentioned at our annual (which was cancelled due to lack of quorum) that dues would be reduced to $140 a month and December would be free.

I am all for money being given back, but are they doing the right thing?

Be thankful you enjoy a budget surplus and a fully funded reserve fund....since you're in Michigan with no end to the economic mess in sight, it might pay to boost reserves a little above what's considered funded as we can never predict when bad times become worse than imagined.

After previous boards got stung a few years in a row on variable expenses, we've opted for mostly fixed rate, predictable contracts for our larger expenses now. Essentially all the regular big operational expenses can be predicted out for the next 2-3 years. This, I hope, will work better for a community our size because there are so few homes to divide unexpected expenses by.

Things like legal fees and maintenance activities are our big wild cards. We try to collect enough to cover a couple contingencies, so we won't need to special access, but we end up with too much at the end of the year if nothing happens. I just hate collecting, for example, $1000 for legal fees each year, but never showing any expense in that category and not being able to return the money ... yes, it eventually gets moved into reserves with any other excess ... but it still seems like it's not right.

Anyway, the MC advised against the credit for a couple of reasons (I'm also certain it would be a pain for them), but I'm more persuaded by the IRS guidelines someone posted. I try to stay on the right side of the rules.

We should have the budget finalized this weekend, so we'll see how it all plays out.

Thanks Mary,

Yes, I agree, the MC should have brought the IRS issue forward. This is the first year that we have has a significant operational reserve, so the previous boards have always budgeted for it. While it was never used, they always run way over in other categories and the surplus was spent.

We were discussing using all but 25% of the operational reserve toward an entrance sign or something else left incomplete by the developer, so we didn't want to factor on drawing from that for legal; however, I think I'm going to suggest that we earmark a target amount for legal funds in our operational reserve so we don't need to keep collecting year-over-year for something we hope we never need to spend on :-) Although I'm certain it's just a matter of time before we get hit with our first lawsuite ... sounds like it's bound to happen.

Thanks for the advice.

I just received our 2010 Annual Budget form the Management Company. It came in with a surplus of $22,411 to $67,000. I thought HOA's were supposed to work on a zero balance budget. I don't have the 2009 budget, but for 2007 and 2008, they both were at zero balance. Our reserves are 149% funded.

Thanks

Richard,

Oops, forgot to ask. Is there a 2009 comparison column on the 2010 budget so you can see where the big differences are? IMO, those are the accounts that need to be closely looked at to make certain they are being budgeted properly.

Richard,

First of all I see no income shown on the budget. Why not?? And secondly, there is only a colum for mo. expenses. What about the yearly expense? Also, IMO, there should be a column for the 2009 budget. Actually our mgr had 3 columns on our 2010 proposed budget: 2008 yr-end actual; 2009 approved budget and 2010 proposed budget. That way the board can make comparisons between the previous year, the current year and the next year.

One item I would certainly question is $980/mo for income and franchise taxes. What kind of non-exempt income does your assn have that you would have such a high tax liability?

I certainly cannot understand why you would be refused a copy of the approved 2010 budget. I'll be interested to know what lame excuse legal counsel gave you for refusing you access to this doc. Every member of the assn should receive a copy of the approved budget!

I agree with you; if they passed a budget based upon the doc you attached, they are a bunch of nincompoops!!