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Thu Apr 22, 2004 8:59PM
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TITLE Seeing 20/20 on 80/20
DESCRIPTION Does section 216 of the tax code financially hamstring co-ops?
TOPIC Taxes
AUTHOR Ford, Ruth
MAGAZINE ISSUE April 2003 - Number 189
ARTICLE TYPE Feature
PAGE # 40-47
ABSTRACT The 80/20 tax code requirement states co-ops cannot generate more than 20 percent of its income from non-shareholders and still be considered a cooperative. This has led to "good" and "bad" income. Techniques for maximizing income while staying within the 80/20 guidelines are discussed.

If you are on an accrual basis, it's money earned, not collected. If you are on a cash basis, it's money collected. I don't think you can forego income. It is taxable, non-taxable, or deferred. I think rental income is taxable. And if the establishment is reporting it as rent expense, then somebody is on the income side. Hence, the concept of cond-op.

While the rental income is keeping the maintenance charge low, it is foregoing the deductibility of the maintenance charge (portion of).

in my old building. The way we got around it was when we signed new leases we took 1 huge prepayment of rent in January then redid the books of the coop to a fiscal year starting February 1. No one paid maintenance for the month of January. This way we only had 1, 1 month year with the 80-20 problem but with the new fiscal year started the income stream for the store was in line because so much rent had been pre paid

Speak with your professional accountant as to what you can do to boost your 80% revenue stream from shareholders so that your 20% is not reached. There are strategies, but you need explore them with your professional. One that comes to mind is the use of master meter of electrical services with re-invoicing of services to shareholders and/or providing cable / internet services to residents and rebilling them, etc. Again, you are boosting your operating budget by the service being absorbed by the co-op, then billing shareholders for their use to incrase your 80% good revenue while reducing your 20% from bad income.

So, your best bet is a good discussion with the accountant and building some concrete strategies with your board.

AdC

There are many options, but ignorance to the potential income should not be one of them. Your accountant can provide many alternatives for you. I have a few of my buildings with this challenge in the past and most of the time I raised maintenance proportionately and then returned that money (in your case 20K) in the form of services such as providing free cable, or laundry, or a gym, the possibilities are endless. I believe your coop lost some good opportunity in the past, but it is not too late to regain it.

~AR