Ask the Expert

Marjorie Jean Meyer, CMCA®, PCAM®
Vice President and National Director of Education and Certification
ASSOCIA

Our homeowner's association was wondering if we are required to have an independant CPA perform a review of our financials every year. If so, how much do reviews normally cost? Can a CPA prepare our income tax return without performing a rewiew of the financials?

- Lori P.

1. I know you don't want to hear a typical attorney's response, but I've got to tell you that "it depends." Here are some issues to consider:
   
   Do you own a condominium, co-op or a townhome/single family home usually considered a planned unit development)? All states have a Condominium Act which may or may not include references to co-ops, but not all states have a statute specifically addressing the operations and administration of planned unit developments.
   
   
2. In what state do you reside? Some states' Condominium Acts have a provision requiring full annual audits prepared by a Certified Public Accountant. Other language refers to an "accountant". Still other states require a simple review or compilation.
    
   
3. If the governing documents for your community association (typically called the Condominium Declaration, Declaration, Master Deed or Declaration of Covenants, Conditions and Restrictions) require a review but your state's statutes require an audit, the statute takes precedence, so you must have an audit. It's important to closely read your association's governing documents and your state's relevant statutes to determine what document takes precedence regarding the need for an audit.
   

Audits vary in price -- another "it depends". Here are some of the considerations:

1. How many homes are in your community?
   
   
2. Are your financial records prepared on the cash or accrual basis? (Accrual is usually less expensive because the CPA must convert cash records to accrual in order to prepare the tax return).
   
   
3. How many financial transactions are there?
   
   
4. How well organized are your financial records?
   
   
5. How long has it been since your last audit?
   
   
6. Are there other issues that CPA must address, such as a bank loan, special assessment, or high delinquencies?

With regard to your question about preparing a tax return, an accountant must ensure that he or she has included all income and expenditures in order to take advantage of all available deductions.

If I've left you with more questions that answers, don't hesitate to write info@associationtimes.com for clarification.

Sincerely,

Margey

Is it proper for the Budget Committee to add under "Revenues" a line item called "Reserve Usage" and pull 10K out of the reserve into ordinary income. Then, because they are mandated to feed the reserve each year, put 3.5K into the reserve. Therefore reducing the reserve by 6.5K in order not to raise assessments??????

- Jerry

We may be talking semantics here, so let's make sure I understand the situation.

Remembering that the purpose of reserves is to set aside money to fund the replacement of common area capital components when their useful life expires, there are several ways that an association may account and budget for the money. Some methods may be more preferred by the American Institute of Certified Public Accountants than others, but as long as the intent is appropriate, volunteer HOA board members deserve some leeway.

That being said, let's determine the purpose of the $10,000 budgeted to be allocated from reserves. It could be that the board is planning to spend that money on legitimate reserve expenditures such as common area roof, fence or equipment replacement. Perhaps not having the accounting expertise to know how to properly itemize those expenses, the board simply created a line item entitled "Reserve Usage" to show that those funds will be removed from reserves to pay for scheduled replacements.

On the other hand, if indeed the board plans to use reserve funds for operating expenses because current expenses exceed anticipated income, it's time for homeowners like yourself to let the board know you'd rather pay a higher assessment to ensure an adequate reserve. In the alternative, perhaps you and your neighbors could help the board develop programs to reduce expenses so that a maintenance fee increase will be unnecessary. With homeowner participation, you may be able to reduce utility consumption, the cost of seasonal planting, and legal expenses involved in collecting delinquent assessments. What other ways do you think you could lower operating costs without jeopardizing property values and harmony in your community?

In most situations, there are two sides to the story. It's sometimes difficult to glean the information you need to understand the real reason for actions such as the one you've described, but in the long run it's worth the effort.

Sincerely,

Margey

Do you know of any materials regarding the pro's and con's of incorporating a homeowners' association. I am the president of an unincorporated association and have been asked to get info on the topic. Thanks for your help.

- Bim T.

Not being an attorney, I'm hesitant to provide legal advice about the reasons for incorporating a homeowners association. So, I went to my favorite resource – the Internet. I entered “advantages of incorporating” and, believe it or not, came up with 29,401 sites! I've cut and pasted information from two randomly-selected sites, www.ailcorp.com and www.bizfilings.com, which specifically address your question.

From www.ailcorp.com:

There are several different types of corporate structures. Although it is not necessary to use a lawyer or an accountant when incorporating, American Incorporators recommends that you consult with either your lawyer or tax advisor to determine the value of incorporating your business and which type of corporation is most appropriate for your business.

Corporation
Although the most formal corporate structure, a general business corporation is the most widely used by both small and large businesses and offers the fewest restrictions. A general business corporation may have an unlimited number of stockholders/owners whose personal assets are generally protected in the event of a lawsuit against the corporation or if the business fails. A stockholder's liability is usually limited to the amount of investment in the business and no more.

Limited Liability Company (LLC)
Limited Liability Companies are a type of business entity. An LLC is a legal entity separate and distinct from its owners, who are called "members." The rights, duties and obligations of LLC members are governed by an "operating agreement." The provisions of the operating agreement are extremely important as they can have a direct impact on how both the LLC and its member-owners are taxed for federal income tax purposes. In addition to tax matters, the operating agreement typically deals with issues of management of the LLC by either members or non-members, transfer of interests in an LLC and termination of the LLC.

When properly structured under applicable state statutes, LLC members have the same limited liability protection which is afforded stockholders in "C" or "S" corporations. This means that, absent any specific personal guarantees, the amount at risk for members of an LLC is limited to their investment in the LLC. Thus, the personal assets of members are generally beyond the reach of the creditors of the business. This liability protection is enjoyed by all members, unlike a limited partnership where at least one general partner must remain liable for partnership debts. And, unlike limited partners, LLC members may be active in the management of the LLC without risking their limited liability status.

LLC members may also enjoy the same flow-through tax benefits which are applicable to partners of a partnership.

Protection of Personal Assets
The major reason why individuals choose to incorporate their business is to protect their personal assets, such as a home, car or family savings. In the event of a lawsuit or if your business should fail, your personal assets can not generally be touched. This limited liability feature of corporations is not available in a sole proprietorship or partnership, where the individual or partners are personally liable for all business debts.

Tax Advantages
Corporations and LLCs can take advantage of tax savings options that are not available to sole proprietorships or partnerships. For example, corporations can establish pension, profit-sharing and stock ownership plans, which can lower the corporation's taxable income. Medical, life and disability insurance premiums are also completely tax deductible for corporations. In addition, a corporation can own shares of stock in another corporation and receive 80 percent of the dividends tax-free.

Corporations can raise capital by issuing stock,bonds or other securities.

Corporations and LLCs are the most enduring form of business structure. If a corporation owner dies, their portion of the business can be transferred quickly without interruption of the corporation's operations.

Estate and family planning is simplified since shares of a corporation can be easily distributed to family members.

Corporations and LLCs often experience a greater ease in doing business. Many stores and banks favor corporate accounts and offer discounts.

From www.bizfilings.com:

What are the advantages of incorporation?

One of the primary advantages of incorporation is the limited liability the corporate entity affords its shareholders. Typically, shareholders and directors are not liable for the debts and obligations of the corporation; thus, creditors will not come knocking at the door of a shareholder or director to pay debts of the corporation. In a partnership or sole proprietorship the owner's personal assets may be used to pay debts of the business. Maintaining the limited liability of a corporation requires that the shareholders and directors follow all the rules of governance, including holding annual meetings and maintaining meeting minutes, which is why we offer corporate forms disks and corporate kits as part of our complete incorporation package.

Other advantages:

• A corporation's life is not dependent upon its members. A corporation possesses the feature of unlimited life. If an owner dies or wishes to sell his or her interest, the corporation will continue to exist and do business.
• Retirement funds and qualified retirement plans (like 401k) may be set up more easily with a corporation.
• Ownership of a corporation is easily transferable.
• Capital can be raised more easily through the sale of stock.
• A corporation possesses centralized management.

What are the disadvantages of incorporation?

The primary disadvantage to a corporation is double taxation. Profits of a corporation are taxed twice when the profits are distributed to shareholders as dividends. They are taxed first as income to the corporation, then as income to the shareholder. All reasonable business expenses such as salaries are deductions against corporate income and can minimize the double tax. Further, the double tax can be eliminated by making an S corporation election.

Other disadvantages:

• There is more complexity and expense with forming a corporation.
• There are more extensive record keeping requirements.
• Operating a corporation across state lines often requires the corporation to qualify to do business in the other state.

What are the advantages of an LLC?

LLCs offer numerous advantages.

• Pass-Through Taxation
  LLCs allow for pass-through taxation. This means that earnings of an LLC are taxed only once. The earnings of an LLC are treated like the earnings from a partnership, sole proprietorships and most S corporations.
• Limited Liability
  The LLC owner's liability is generally limited to the amount of money which the person has invested in the LLC. Thus, LLC members are offered the same limited liability protection as a corporation's shareholders.
• Flexible Management Structure and Flexible Ownership is Permitted
  Like general partnerships, LLCs are generally free to establish any organizational structure agreed on by the members. Thus, profit interests may be separated from voting interests.

What are the disadvantages of an LLC?

The disadvantages of an LLC include:

• More Paperwork Than an Ordinary Partnership
  Documents must be filed at the state level to create an LLC, which is not the case with a general partnership.
• Dissolution Date
  Some states require that a dissolution date be listed in the articles of organization. This date may be amended. Further, certain events, such as death of a member, a member leaving, bankruptcy, etc. can be a dissolution event. A corporation has unlimited life and these events are not dissolution events for a corporation.
• Newer Entity Type
  The LLC is a newer entity, and people are not as familiar with the LLC as a corporation.

Sincerely,

Margey

We have a homeowner who is in dispute with the Board and keeps referring to Florida Home Owner Association Law. We are a not for profit Homeowner Association and Fall under section 617 of the Florida Statutes but I can't find anything on Florida Law for Homeowner Associations. What is this homeowner talking about.?

- Walter B.

Not knowing if you're referring to a condominium association or a property owners association (also called a homeowners association or a community association), I have the following references for you:

Chapter 718 of the Florida Statutes is the Florida Condominium Act. It addresses, in great detail, how condominium associations must be operated in the state of Florida and lists the powers and authority of the board of directors.

Chapter 720 of the Florida Statutes was created for homeowner associations which are not condominiums. It, too, is very specific in how the members of a board of directors must administer their community.

These statutes, as well as a wealth of information on Florida governance and legislation, can be accessed online at www.leg.state.fl.gov, then click on "Laws".

I hope you find the answers to all your questions at this website and can now respond to your homeowner with great authority!

Sincerely,

Margey

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