In the 1980s, a trickle of co-op conversions turned into a tsunami. Today, some three decades later, many of those co-ops are coming to the end of their buildings’ depreciation cycles, a prime tool for softening or avoiding the sting of federal, state, and city income taxes on corporate profits. Depreciation of the building’s value is spread out between 27.5 and 40 years after the conversion, and with many of those cycles now expiring, boards need to be ready to adapt. “An era is ending,” says Avi Zanjirian, audit manager at the accounting firm Czarnowski & Beer. “There are two things for boards to consider. First, if your building has stopped depreciating, check to see if you have depreciation on building improvements, such as elevators, roofs, and facades. They might offset the loss of the building depreciation. Second, check to see if you have accumulated net operating losses, and how much they are, and when they expire. They carry forward for 20 years.”
If a co-op shows a profit – as many are doing, thanks to energy conservation and upgrades – the loss of both building depreciation and net operating loss carryovers can expose the co-op to significant tax liabilities. The federal tax on corporation profits used to range from 15 percent to 35 percent, based on the size of the profit; under the new federal tax law, the rate is a flat 21 percent, which favors big earners. The city rate is 8.9 percent, and the state rate is 6.5 percent.
Even if a board has exhausted its depreciation and net operating losses, though, it’s still possible to shield a surplus from income taxes. A surplus is not taxable provided the board informs shareholders that the money is being placed in a restricted reserve account, and the money is used exclusively for capital improvements.
Since a condominium association doesn’t own its building, it doesn’t get to use depreciation. But, like co-ops, condos can avoid tax liability by allocating a surplus to reserves and earmarking it for use on capital improvements.