Home Owners Associations Nonprofit Financial Management, Part 2

Welcome to Part II of our series on nonprofit financial management tips. Today we’ll take a look at accounting and tax service for nonprofits with a view towards the overall needs for both at a Home Owners Association.

In Part I, we defined an HOA and discussed the definition of duty of care and duty of loyalty. Next, we talked about the nonprofit financial management needs of an HOA, including financial responsibilities and insurance needs.

In Part II, we’ll look into the accounting and tax service needs for HOAs.

Accounting Requirements

The Board of a Home Owners Association is required to keep accurate accounts of the financials of the organization. This includes income from membership fees or assessments, expenditures, accounts receivable and accounts payable. The board must report these financial facts to its members. It is required by law to follow all corporate law within the state in which it is incorporated, and to follow the tax requirements for nonprofit associations if it is incorporated as a nonprofit entity.

Tax Deductions and Requirements

In a cooperative setting, tenants are actually shareholders in the cooperative housing corporation. As such, they do not actually own their residences. Rather, they own shares of stock in the cooperative cooperation, which entitles them the exclusive use of a particular residence in the cooperative.

Because they don’t own their residences, rules regarding tax deductions are a little different than if they owned their home or the actual residence. The cooperative’s tenant-shareholders receive certain tax benefits allowed to homeowners, including the ability to deduct their proportionate share of the real estate taxes and interest allowable as a deduction by the cooperative if the cooperative qualifies as a cooperative housing corporation under IRC Section 216 .

The housing group or cooperative housing cooperation must qualify annually for IRC Section 216; it is not a permanent designation. To qualify, the cooperative must meet the following criteria each year:

  1. The cooperative must be taxable as a corporation.
  2. There must be only one class of stock outstanding.
  3. Tenant-shareholders must have the right to occupy their units for dwelling purposes.
  4. At least 80% of the cooperative’s gross income must be received from tenant-shareholders; 80% or more of the total square footage of the corporation’s property is used or available for use by the tenant-shareholders for residential purposes or purposes ancillary to such residential use; or 90% or more of the expenditures of the corporation during the taxable year are for the acquisition, construction, management, maintenance, or care of the corporation’s property for the benefit of the tenant-shareholders. (Only one of the three requirements must be met.)
  5. No tenant-shareholder is entitled to receive a non-liquidating distribution that is not out of earnings and profits.

Capitalization Policy

We recommend that a Cooperative develops a capitalization policy. Such a policy sets forth expenditures for improvements, such as replacing roofs, windows, carpeting, doors, etc. for the building. It may also budget for alterations to an existing building. This may include enlarging the parking area, adding new bathrooms to the lobby or other improvements.

A capitalization policy for a Cooperative or HOA is similar to any capitalization policy a nonprofit would create. It’s budgeting for the future and for improvements to your organization.

By taking a smart look at the accounting and tax service for nonprofit needs of your cooperative and HOA, you’ll be in a better position to manage it responsibly. That translates into positive benefits for everyone who enjoys living within the HOA.

Beck and Company: Nonprofit Financial Management Expert

At Beck & Company, we have extensive experience and a tradition of creative thinking, technical expertise, and a collaborative spirit that can help your nonprofit achieve its goals. From accounting and tax service for nonprofits to consulting on issues impacting nonprofits today, Beck & Company can help. Contact us today or call 703-834-0776.