Condominium Association Experts - help please!

[Zee]

I have a couple of questions. I recently was "elected" (that's a loose term since I wanted no part of it) as Treasurer of our Rack-O-Minium for boats (that's a $60000 - $100000) hole in the wall of a building for boat storage and launching.

The Association is an incorporated non-profit. My understanding is a 1120 is filed and taxes are either at a fixed 30% rate, or the standard Corporate rate (whichever is less). Is that correct?

I have some other accounting related questions if there are any experts here, please email me. I don't want to burden the board with those non-tax questions.

[Uncle Sam]

Condominium Association

Zee - I have experience with a Condominium Association for homeowners - I don't know whether one for boats follows the same rules.
First - your post has a couple of inconsistencies.
A corporation that files an 1120 is NOT tax exempt.
It's a C corporation that is supposed to file 1120.
However - there is an exception where the business activity involves residential real estate management. Here's where the confusion of "tax exempt" comes in.
An alternative to filing 1120, when the taxable income of the Association will produce a higher tax - the corporation can elect, on an annual basis to file Form 1120-H and pay taxes at a flat rate of 30% of the non-exempt function income and expenses.
Non-exempt means the net income derived from non real estate management source income.
For example - interest and dividend income on investments, miscellaneous fees and commissions from rental of storage space, laundry room income, and miscellaneous income received from non unitholders' common charges.
Two rules need to be adhered to -
At least 60% of total income must come from exempt purpose sources-common charges, late fees, move in/move out fees, special assessments.
At least 90% of total expenses must be paid for exempt purposes - real estate taxes, utilities of common areas, insurance, repairs and maintenance.
If you fail either of those two tests - you MUST file 1120 - can't use 1120-H.

[Zee]

Thanks, an 1120 was filed last year and the income was minimal. The Property Manager described the Rack-O-Minimum as a non-profit, it appears they are a not-for-profit, incorporared taxable entity and don't even come to close to meeting the requirements for tax exempt status, or using an 1120H under IRC#528. Thanks for the correction on how the election would be handled on the tax rate.

The Property Manager also indicated the budget cannot show a profit. If taxed on profits, why not? Is that a legal requirement of some sort?

There are numerous other accounting and tax issues I need to learn. I live in a Homeowner's Association, they utilize reserves and the laws governing Community Associations here in Florida don't dovetail, but they're close. However, the presentation of the financial statements, budgets, etc. are very different. The Homeowner's Associations is more detailed and in more of the standard format I would have expected.

The Rack-O-Minium uses Quickbooks and transmits the data to an Accounting group called Accounting Pros (not the real name), there is no transmittal letter or cover letter received with the statements although the owner has a business card indicating he's a CPA. It was my understanding that CPA's couldn't provide Accounting services under an assumed name here in Florida. The preparer signature of the tax return is also the assumed name. Also, it was my understanding that if a CPA preparers a financial statement that isn't a compilation, review, or audit, it still needed a transmittal or cover letter indicating the statements were prepared for Management Use Only here in FL. Also, that each page of the statements was to be stamped Management Use Only. They aren't.

Are there any Florida CPA's here that can verify my understanding?

[Uncle Sam]

Condominium Association

If there's anything I've learned in all the years I've been working with this Condo Association - is that the LAST PERSON you listen to is the managing agent. They are the most ignorant people I deal with in understanding the tax rules related to a Condo's operation. Their only concern is to collect the money, pay the bills, and print out financial reports based on their specialized software program for property management.

How can a taxable business be tax exempt? There's no such thing as the corporation CAN'T make a profit. If it does, then it pays taxes just like all other businesses. The only leniency it gets, is, it has the OPTION, to treat its net income from non real estate management related activities AS IF it were a tax exempt organization, being taxed at a flat 30%. That does NOT MEAN it's a tax exempt organization, that files Form 990.

[Davc]

"The Property Manager also indicated the budget cannot show a profit. If taxed on profits, why not? Is that a legal requirement of some sort?"

You need to see the governing documents of the Association. There may be something that prohibits accumulation of funds without board and/or member approval. As far as taxes go, the only time budgets mean squat is when preparing a 1023 or 1024 for an organization that is filing using future projections.

[LCP]

I've got a new condo association client also. Hopefully I can climb aboard and ask a couple of questions ......

Dues for operating expenses exceeded those expenses by $5700..... are they taxed on that?

In addition to that they report "Dues paid in advance" .... it appears that is a timing difference and they get taxed on last year's "advance" and not this year's. Does that make sense.

They also collect and set aside funds for major repairs ...... this year the collected $4800 more than they paid out. I'm not sure to handle that activity? Over the years, that balance has accumulated to $74,000.

They had interest income of another $3000.... taxable and no special handling correct?

TIA

[Uncle Sam]

I've got a new condo association client also. Hopefully I can climb aboard and ask a couple of questions ......

Dues for operating expenses exceeded those expenses by $5700..... are they taxed on that?

In addition to that they report "Dues paid in advance" .... it appears that is a timing difference and they get taxed on last year's "advance" and not this year's. Does that make sense.

They also collect and set aside funds for major repairs ...... this year the collected $4800 more than they paid out. I'm not sure to handle that activity? Over the years, that balance has accumulated to $74,000.

They had interest income of another $3000.... taxable and no special handling correct?

TIA

A condominium association is a taxable entity (if formed under state laws as a corporation).
You've described a number of facts without giving a complete picture.
Is the corporation on the cash basis or accrual basis?

If on the cash basis - there should not be "Dues Paid in Advance"

You should explore whether it would be more advantageous for the corporation to file an 1120-H, instead of 1120. By doing so, you are only paying taxes at the flat rate of 30% of non-exempt income (such as interest income) rather than on the total operating income at the normal corporate rates.

Regarding the capital improvements - you need to look at what and how the funds were charged for the major repairs. Were they picked up as normal additional common charges, or were they treated as additions to corporate capital? If the repairs effected ONLY the common areas and greatly enhanced the value of the property, then it's conceivable that they are additional capital.

[LCP]

A condominium association is a taxable entity (if formed under state laws as a corporation).
You've described a number of facts without giving a complete picture.
Is the corporation on the cash basis or accrual basis?

If on the cash basis - there should not be "Dues Paid in Advance"

You should explore whether it would be more advantageous for the corporation to file an 1120-H, instead of 1120. By doing so, you are only paying taxes at the flat rate of 30% of non-exempt income (such as interest income) rather than on the total operating income at the normal corporate rates.

Regarding the capital improvements - you need to look at what and how the funds were charged for the major repairs. Were they picked up as normal additional common charges, or were they treated as additions to corporate capital? If the repairs effected ONLY the common areas and greatly enhanced the value of the property, then it's conceivable that they are additional capital.

Uncle Sam: Thanks much for the input. I really appreciate the help. Here's some add'l info..... if you'd rather email me directly that would be great (klsdad@comcast.net) !

They are on the cash basis. They did treat the "advance" as current revenue last year but reduced the gross revenue by a small amount on a line called "Rev Rule 70-604 carryover". I can't determine where that amount came from.

They segregate the roof activity in an account referred to as an escrow account and the balance (assesments less repairs plus interest) is treated as an appropriated retained earnings.

It doesn't appear that those assesments have ever been treated as revenue nor are the amounts paid out expensed or capitalized and depreciated.

I can follow all of the accounting from a summary to last year's tax return except for that Rev Rul 70-604 figure that is reducing gross revenue.

Thanks again!

[Uncle Sam]

Condo Association

I was out at a seminar today, and will be at ANOTHER one for Wed and Thurs this week.
I will check back here Friday.

[Uncle Sam]

Condominium Association

IRS Headnote

Excess assessments by a condominium management corporation, over and above the amounts used for the operation of condominium property, that are returned to the stockholder-owners or applied to the following year's assessments are not taxable income to the corporation.

Full Text

Rev. Rul. 70-604

A condominium management corporation assesses its stockholder-owners for the purposes of managing, operating, maintaining, and replacing the common elements of the condominium property. This is the sole activity of the corporation and its by-laws do not authorize it to engage in any other activity.

A meeting is held each year by the stockholder-owners of the corporation, at which they decide what is to be done with any excess assessments not actually used for the purposes described above, i.e., they decide either to return the excess to themselves or to have the excess applied against the following year's assessments.

Held, the excess assessments for the taxable year over and above the actual expenses paid or incurred for the purposes described above are not taxable income to the corporation, since such excess, in effect, has been returned to the stockholder-owners.

[Uncle Sam]

Condominium Association

LCP- What you're describing doesn't make sense.
The money set aside for major roof repairs (referred to as a Reserve Fund - not "Escrow Account") should be accounted for either as Appropriated Funds in the Capital section of the balance sheet, and after expended should either be considered additional capital, or income picked up somewhere along the line when the money is considered to have been received.
I suggest you read a Source and Application of Funds statement - that will provide you the information you're looking for.
When the money was spent, it either should have been expensed as repairs (if governing board considered all relevant factors and determined under the tax law it's appropriate - or should have been capitalized with a depreciation period. A corporation tax return's depreciation schedule can give you that information.

[Zee]

IRS Headnote

Excess assessments by a condominium management corporation, over and above the amounts used for the operation of condominium property, that are returned to the stockholder-owners or applied to the following year's assessments are not taxable income to the corporation.

Full Text

Rev. Rul. 70-604

A condominium management corporation assesses its stockholder-owners for the purposes of managing, operating, maintaining, and replacing the common elements of the condominium property. This is the sole activity of the corporation and its by-laws do not authorize it to engage in any other activity.

A meeting is held each year by the stockholder-owners of the corporation, at which they decide what is to be done with any excess assessments not actually used for the purposes described above, i.e., they decide either to return the excess to themselves or to have the excess applied against the following year's assessments.

Held, the excess assessments for the taxable year over and above the actual expenses paid or incurred for the purposes described above are not taxable income to the corporation, since such excess, in effect, has been returned to the stockholder-owners.

I'm still trying to determine if this also applies to a commercial condominium - not a residential, homeowner, or trailer association. The law seems to reference residential associations, or other membership associations social in nature. Our Boat Rack Condominium Association doesn't have residences and isn't social in nature (It's a hybrid...not specifically identified in Fl Condo law either). Our Association had a $64,000 rollover last year. In the absence of something more specific excluding a Commercial condo, I'm inclined to agree the Section 277 usage was correct. I guess it wouldn't be unlike Office Condominiums that were the rage until the crash.