When do community associations need to vote to roll over surplus funds to the next fiscal year?

Monica Johnson
Monica Johnson

In order to avoid adverse tax consequences, community associations should consider conducting a vote to apply surplus funds in their operating budgets at the end of their fiscal year to the budgets for their next fiscal year.

The two common tax return filing options for associations are form 1120, referred to as the corporate income tax return, and form 1120-H, which is used by associations to take advantage of certain tax benefits that allow associations to exclude certain income (membership dues, fees, or assessments) from their gross, taxable income.  Associations should consult with their accountants to determine which type of tax return they will file, as there are different qualifications and benefits for each.

If an association is filing an 1120 tax return, the Association will be taxed on the excess funds in its operating account unless it  holds  a membership vote to either roll over the surplus funds to the following year or  return the excess funds as a rebate to the members.

Although it is not necessary to have a membership vote to roll over the surplus funds if an association plans on filing an 1120-H tax return, a situation may arise in the middle of the fiscal year that causes the association to be unqualified to file an 1120-H tax return.  For example, a satellite company may pay the association  to put up a cell tower, causing the association’s income that year to be comprised of less than 60% from assessments.   If that happens, the association would have to file an 1120 tax return and would be taxed on the excess income in its operating budget  unless there has been a vote to either  apply the excess assessments to the following year’s expenses or return excess funds to the members.  Therefore, regardless of which tax return form a community association files, all associations should consider conducting a membership vote every year to roll over their surplus funds.

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