Cohousing-L Mailing List: HOA Accounting/Taxation

[Zeke Holland (zholland]

I'm the treasurer of the Two Echo Cohousing HOA -- a volunteer position for
which I have little background.  My first year at the job I mostly repeated
what had been done by previous treasurers.  Now wrapping up my second year I
have questions about how to do things right.  I'll list five of them below,
as I would expect many other communities to have similar questions.  Posted
comments/answers are welcome, but what I really want is to connect with
someone well-versed in HOA accounting who would be willing to review our
accounting practices, either out of their joy in sharing cohousing
knowledge, or as a paid service.  Please contact me directly if you have
that ability and interest.

1. Tax reporting via Form 1120 or 1120-H...  Initially there was no question
that the simplicity of 1120-H made it the way to go.  Now we have reserves
earning thousands of dollars in taxable interest annually, which makes me
wonder if it would be worth going for the lower tax rate of 1120.  But as I
understand it the accounting rules would be much more stringent, we would
have to make changes to match, and the risk of an audit is much higher.
Would it be worth it; what do others do?

2. In addition to our reserve funds for long term capital replacement of the
common house, road, etc, we have "reserves" for Contingency and for
Community Improvements.  Neither of these have associated infrastructure
that they cover with a schedule of lifespan and replacement cost.  Thus, I
believe they do not qualify as "reserves" in the eyes of the IRS.  Under
1120 rules I believe any contributions made to these funds would be
considered taxable income.  We usually have a surplus in our operating
budget, and we roll it into Community Imrpovements at year end.  Is this
allowed (not taxed) under 1120-H rules?

3. We do not maintain separate bank accounts for reserve funds versus
operating funds (we invest reserve funds in CDs, but we merely purchase a CD
when we have accumulated excess funds in our checking account -- there is no
exact correspondence between the amount of the CDs and the reserve balances.
As I understand it, we would have to change this practice to comply with
1120 rules.  Is it acceptable so long as we stay with the 1120-H approach?

4. We ask for a $15/night donation for use of our guest room in the common
house.  It is treated as a donation because we are not allowed to operate a
business in the common house (nor would we want to be regulated as a Bed and
Breakfast).  Unless we can directly tie this income to an expense of
operating the guest room, it must be treated as taxable income, yes?

5. Similarly, we have a small monthly Associate Fee that we charge neighbors
who are not HOA members to become "Associates," which entitles them to use
the common house and participate in most community activities.  Since this
income is not coming from property owners, I believe it must also be treated
as taxable income, yes?

I'd like to get this stuff right.  Any experts willing to review our entire
accounting practices?
--Zeke Holland
Two Echo Cohousing
Brunswick, Maine