Condo Media - October 2010 - 31

with your association’s bank to see if they participate. If they don’t, your association’s FDIC limit is simply $250,000.

very important to respond to, and rectify, these matters professionally and promptly.

IRS Audits
It has been fairly well publicized that the Internal Revenue Service (IRS) has increased the number of audits it is performing on taxpayers, both individual and corporate. This author went for approximately 15 years without seeing a single IRS audit of a homeowner association to five to six in the last three years, and has consulted with several other CPAs representing other homeowner associations being audited by the IRS. The good news is that none of these audits indicates an IRS assault on homeowner associations as they all appear to have been randomly selected, not specifically targeted. An audit is always concerning, but the chances of a poor outcome can be lessened (but not eliminated) if:

Massachusetts Tax Filing Requirements
One full “tax season” has passed since the Commonwealth of Massachusetts changed the tax return filing requirements for homeowner associations. The majority of associations have not been impacted, but those that are incorporated and those with significant sources of taxable income (the most common sources being interest income, rental income from association-owned units, income from telephone/cable/Internet companies for exclusive marketing agreements, and income from cellular phone companies renting roof space for cellular antennas) now have to file more complicated tax returns with the Commonwealth and pay more in state tax. Prior to 2009, the vast majority of Massachusetts homeowner associations filed a very simple Form 3M, regardless of which federal tax return was filed with the IRS. Under the new law, if your homeowner association is a corporation (as opposed to the far more common trust), or if your association files a Federal Form 1120 (rather than the more commonly used Form 1120-H), you are required to file a Form 355 with the Commonwealth and be subject to a much higher rate of tax on your taxable income, and, in all cases, be subject to a minimum tax of $456. There is much more to this topic, which was extensively covered in the March 2010 issue of Condo Media.

deficit; and formulas that require minimum reserve funding levels. Be on the lookout for these provisions and either make sure your association is in compliance, or discuss the possibility of amending the governing documents with the association’s attorney.

Budgeting Tips
Homeowner associations in the Northeast will always have to contend with the difficult budgeting variables of snow removal and utilities (due to both extreme weather conditions causing unpredictable demand, and volatile pricing due to oil prices). New budgeting matters to be concerned with have been introduced in recent years by regulatory bodies as a reaction to the mortgage crisis that has been well publicized over the last couple of years. While the mortgage industry for homeowner associations has seen significant changes, the two most significant from a budgeting standpoint involve the amount of the annual reserve fund contribution and budgeting for an insurance deductible. The new 10 percent rule requires that a minimum of 10 percent of the annual revenues be contributed to the reserve fund each year. From a budgeting standpoint, this requirement can be very problematic. The majority of associations do not fund their reserves anywhere near this level, and complying with this requirement inevitably necessitates very unpopular increases in condominium fees. Many associations still are not in compliance, and are waiting to see potential sales fall-through due to lack of compliance before making this adjustment. The second budgeting issue caused by changed mortgage regulations requires homeowner associations to include an amount in the budget to fund the insurance deductible for one claim. CM Kenneth A. Bloom, CPA, is with the accounting firm of Bloom Cohen Hayes LLC in Needham, Mass. He is a longtime CAI-NE member and national faculty member.

Your association is managed by a reputable professional management company knowledgeable in the proper operating of homeowner associations The CPA who prepares your association’s tax returns is experienced in navigating the confusing waters of homeowner association taxation. If your association has the misfortune of being selected for an audit, it is important to immediately retain qualified representation (either a CPA or tax lawyer) to represent your association, as these matters can get quite technical and are best left in the hands of experts. The IRS (and state taxing authorities, such as the Massachusetts Department of Revenue) also creates various computer-generated correspondence questioning matters such as the use of improper taxpayer identification numbers, inconsistent fiscal year-ends, discrepancies in tax payments, etc. It is

Condominium Document Financial Provisions
Many sets of condominium documents contain various financial provisions that often go unnoticed. Two of the more common that fall into this category include: the prohibition of deficits by requiring governing boards to levy a special assessment to restore an actual, or reasonably foreseeable,

CONDO MEDIA • OCTOBER 2010

Condo Media - October 2010

Table of Contents for the Digital Edition of Condo Media - October 2010