Orchid Management Solutions logo

954.943.9900

Avoid the appearance of financial impropriety

Avoid the appearance of financial impropriety

Oct 1, 2016 | Financial

Avoid the appearance of financial impropriety

As you well know, appearance is often interpreted as fact.

Many times, I have seen condominium boards give the bookkeeping for the association to a relative (spouse or child) or to another related party (e.g. roommate or significant other).  Many times, the intention behind this is good.  The bookkeeper is professional, or at least thinks they know enough to handle it, and he/she either isn’t charging the association at all (usually in the case of a spouse) or is charging at a supposedly reduced rate.  All’s good, right?  Probably not in the eyes of the unit owners.

This is a very dangerous situation, from multiple standpoints.  First, even if everything is on the up and up, it looks terrible to the unit owners.  The image is of collusion: that the board member and bookkeeper are working together to either steal or otherwise hide something.  This can lead to a steadily deteriorating atmosphere of distrust.  Secondly, it often does lead to theft of one type or another.  I’ve seen board members pay their personal FPL bill from the association’s account.  After all, he’s the president – isn’t he doing all the work and deserves something?  Small amounts maybe, but still theft, but easy to hide if the bookkeeper is a related party.  And of course, small amounts often lead to the embezzlement of large amounts.

For the other members of the board: it can make them look like they are avoiding their fiscal responsibilities by allowing this to happen.  They look bad because they are painted with the same brush and are therefore part of the untrustworthy.

The best way to avoid this is keep your bookkeeping in the hands of a truly independent third party.  That may be a solo bookkeeper who works out of his or her own home, a bookkeeping firm, or a CPA firm.  Whichever way you go, you do want to ensure that you are selecting a person or firm that not only knows proper bookkeeping but also knows and understands Florida statutes and the administrative code relating to your property type.

We owe taxes???

We owe taxes???

Sep 24, 2016 | Taxes

We owe taxes???

Non-profit does not mean tax-exempt.  Often, board members, and sometimes even managers, think that condominiums, co-operatives, and homeowner associations (collectively referred to as CIRAs by the IRS, common interest real estate associations) are tax exempt.  They are not.  However, they generally have little taxable income, and can escape taxes most years.

When are they not taxable?  To file a simplified form 1120-H, rather than the full corporate 1120 return, a CIRA must meet the following requirements:

  1. At least 60% of the association’s total income must be exempt function income.
  2. At least 90% of the association's expenses for the tax year must consist of expenses to acquire, build, manage, maintain, or care for its property
  3. No private shareholder or individual can profit from the association's net earnings except by acquiring, building, managing, or caring for association property or by a rebate of excess membership dues, fees, or assessments.

In the case of our Florida condominiums, exempt function income consists of membership fees or assessments from owners of condominium units.  This income must come from the members as owners, not as customers, of the association's services.

What is taxable income?  All other income that does not qualify as exempt function income.  So, basically that’s everything other than Maintenance Fees on your monthly income statement:  rental income, laundry income, screening fees, late fees, interest earned, etc.  When completing your tax return, you allocate expenses directly connected to the production of the non-exempt income as deductions against that income to reduce your bottom line taxable income, which is taxed at 30%, if filed on form 1120-H.  The big item here that often pushes CIRAs into a taxable state is rental income.

Rental income is absolutely a great bonus.  This is money the association actually gets to collect, usually after foreclosing on a prior owner who didn’t pay.  Now, the unit is in the Association’s name and bringing in income.  The Board is thrilled.  However, this income often pushes the CIRA over the line into taxable, and can also cause you to fail test 2 above, forcing the association to file a full form 1120, and therefore, a Florida tax return as well, resulting in higher fees from your CPA.

What can you do about this?  First, make sure you are allocating all expenses related to the rental of that unit as deductions against the rental income.  The best way to do this is to have separate line items for the expenses related to the rental unit.  These may include things like water, electric, a/c repairs, painting the interior walls to ready the unit for rental, etc.  After that, ensure that you set aside and not spend 30% of the rental income to pay for any taxes that may be due at year end.  Yes, nothing in life is free!

Please note, however, that form 1120 carries a different tax structure.  Sometimes, filing an 1120 (and therefore the state F-1120 must also be filed) can result in a lower overall tax bill.  If you meet the 1120-H test, consult your CPA on which form is best to file.  This election can be made each year, independently of every other year.