You’ve done your best all year, and now you and your association have realized a year end surplus. What should you do with the funds? Who makes the decision, the board or the owners?
There are several choices: roll the funds into reserves, issue a refund to the owners, budget the surplus into next year’s budget (and thereby lowering it), or roll the funds into a contingency account, for an unexpected expense. Unless your documents provide otherwise, the decision is generally up to the board of directors. However, there could be tax consequences to the decision.
As with all large monetary decisions, the board should always keep in mind its fiduciary duty to the owners to protect the assets of the association and to manage its funds in a fiscally sound manner.
While the decision of how to handle a surplus is ultimately the board’s decision, they should consult closely with their CPA concerning both the timing of the decision, and any resulting tax consequences.
For example, if an association files a standard form 1120 for corporations, then revenue ruling 70-604 will apply. This rules states that an owner vote must be held to decide to roll the funds over to next year and avoid taxation, or return the funds to the owners. If you file an 1120-H, however, this ruling does not apply. You can also avoid it by rolling the funds into reserves, but it must be done prior to yearend.
In summary, consult with your CPA before yearend, before the date limits your options.
