Every HOA benefits from hiring accountants or seeking out board members with strong accounting skills in order to help the board run their financials smoothly.
If your board is lacking a finance whiz, we strongly recommend hiring an accountant to keep up with all financial reporting throughout the year.
Homeowners Associations are like a business; They deal with large amounts of money that comes in and goes out on a monthly basis. Every dollar your board makes must be accounted for properly and one of the biggest troubles HOA’s can run into is later learning that your association owes money. Additionally, mishandling the HOA’s money will incur a multitude of legal issues and will create a wide distrust from members of your community.
HOA’s require thorough financial planning, and it’s recommended to create a financial proposal a few months before the end of the fiscal year. This is where the help of an accountant or an astute board member will come in handy. All of these financial decisions should be discussed and decided upon by the board and the community before being set into motion.
One aspect of HOA accounting your board should be acutely aware of is the importance of taxes. Despite the fact that most HOA’s are considered non-profits, the Internal Revenue Association still deems HOA’s to be a corporation, and you must file your federal and state tax returns every year. However, this doesn’t necessarily mean your HOA will owe taxes. Many HOA’s choose to file under section 528 of the IRS code. In order to file under this section, your HOA must be legally organized as an association, it must generate almost all revenue from homeowner assessments, and all of that revenue must be used to maintain the community common areas. The majority of all of this income– including member fees, architectural fees, and more– is not taxable. Other forms of income, for example if you rent out one of your facilities to a non-resident for an event– are taxable at the end of the year. It’s crucial to get clear on what is taxable and what isn’t before filing each year.
Another key aspect to consider as you undertake your HOA’s accounting is fraud. We don’t often think HOA’s can be subject to embezzlement and/or fraud, but it does happen from time to time. On some occasions a third party HOA management company can subtly take the HOA’s funds, sometimes payments are made to vendors that don’t actually exist, and other times an HOA’s fidelity insurance may be insufficient– these are all cases in which fraud and embezzlement become a major issue. In order to protect your HOA from fraud, it is of the utmost importance to carefully review each and every financial statement that comes through each month. Create a rigorous system of checks and balances that ensures there is no single individual on the board that is responsible for any incoming or outgoing money. Maintain this system of checks and balances by designating at least 2 or more people to sign off on and verify every single time money is coming in or out of the association. This goes without saying, but delegate someone or hire someone to keep all receipts, and closely monitor every investment the HOA makes.
How 2 HOA provides complete guides on how to get started in the financial process and how to consistently manage your association’s finances. Managing the whole community’s money can be a daunting task, but our guide will help alleviate the stress of your board’s money matters. Do not hesitate to contact our team should you have any questions as you plan your board’s financial year!