uI was invited to propose my auditing and accounting services for a condominium association in Queens. Before meeting with the board, I requested a copy of its last audited financial statements so I could get an idea of its activity.
I noticed that they had a federal income tax expense of $15,000, but the profit-and-loss report showed a loss. Something did not seem right: it appeared from the financials that the association should have paid no federal tax. At our interview, I brought this up, and the board became very concerned.
Over the next two days, the manager phoned me several times with questions and emailed me copies of the association’s tax returns. It turned out that it overpaid its 2018 taxes by $23,000.
If a condominium association qualifies, as this one did, it can elect to file as either a homeowners’ association (HOA) or as a corporation. If you file as an HOA, the only thing you get taxed on is nonmember income. For example, interest income and rent from cellular antenna space on your roof would both be taxable, with an allocation of certain expenses (generally not enough to offset this income).
If you file as a regular corporation, your total income minus total expenses equals your profit or loss. If you have a lot of nonmember income and an overall loss, most likely you would be better off filing as a corporation. If you do not have nonmember income, nothing would be taxed on the homeowners’ association, even if you had a profit.
The former CPA filed the wrong form: the condominium filed as an HOA and paid tax on its interest income and cellular-rental income. If it had filed as a corporation, it would have had no tax.
When hiring and retaining a certified public accountant for your co-op, condo or HOA, it is important to find one with experience in this field. If you don’t know what your CPA doesn’t know, it could cost you serious money.
Jay Menachem is a certified public accountant specializing in audits of co-ops, condos and homeowners’ associations.