INTEREST ON RESERVES

QUESTION: How is interest on reserves treated? Can interest be transferred into the operating account or does it have to stay in the reserve account?

ANSWER: The Davis-Stirling Act does not regulate how interest is allocated. Governing documents generally do not address the issue either. However, reserve funding plans usually allocate interest. If the funding plan assigns interest to the reserves, then it must stay in reserves. If the funding plan is silent, the board may transfer accumulated interest into the operating account. 

Taxes. Interest is taxable. Some boards think that because associations are nonprofit corporations, they don't pay taxes or file returns. That would be a huge mistake. Depending on how their return is prepared, associations might pay little or no taxes but they must still file a return. If your association has not filed tax returns, your board should immediately seek legal counsel.

For a list of CPA firms that specialize in preparing tax returns for for community associations, see our Service Directory.

Updated by ADAMS KESSLER 8/9/2008