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Look Both Ways Review Last Year's Results Before Creating Next Year's Budget

The Roman god Janus had two faces that allowed him to look backward into the past and forward into the future. When thinking about end-of-the-year association finances, boards would do well to take a lesson from Janus and look back at expenses from 2011 and ahead toward obligations in 2012.

December is the month to take stock of the association’s overall financial management, its budgeting and accounting practices, and to prepare for filing federal and state income tax returns.

Even though most homeowners associations don’t generate much in the way of net income, they must still file annual income tax returns to the IRS. (States have their own tax forms that must also be filed.) The most common forms are the 1120 and 1120-A. A third form, 1120-H, is more basic and straightforward to fill out, says David A. Levy, CPA, of Brookline, Massachusetts, but the disadvantage is that it taxes at a higher rate. (For more details about tax forms, see the July 2008 New England Condominium issue on Community Budgets & Finance, available online.)

Choosing which IRS form to use can be difficult, because those for HOAs don’t look like the forms people are used to. “They’re more like mongrels,” says Mark Love, CPA, of Love, Jarominski & Raymond LLP in Worcester, Massachusetts. “It’s easy to fill out the incorrect form, which can be time consuming and expensive to rectify.”

Data for tax returns is drawn from regular financial statements generated by the management company or, in the case of a self-managed association, by the treasurer or CPA. But it is the board’s responsibility to monitor these reports. “If you have active, involved board members who take their fiduciary responsibilities seriously, they will examine monthly statements,” says Levy. By the time the board arrives at the end-of-year reckoning, its members are in a better position to assess the association’s financial health and are less likely to encounter unwelcome surprises.

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