Community associations are usually incorporated as not-for-profit corporate entities; therefore, an association’s goal is to avoid making a profit or loss at the end of the year. Though it isn’t common, community associations can sometimes end the year with a budget surplus. Board members must be careful when handling the situation because a misstep could result in a dissatisfied, untrusting membership. If there is a budget surplus, board members have a few options, one of which is to refund the money to the members. Refunds are usually not a
One reason a community association may end the year with a surplus is that operational expenses were less than anticipated. In addition, there might be a surplus if the association’s income was higher than was expected when drafting the budget. Finally, though rare, in some instances, the board may have purposely over-projected the association’s financial needs to create a surplus. While there can be other contributing factors, these are some of the most common ways an association can end up with a surplus at the end of the year.
Note: Always consult your association’s CPA to ensure that tax implications are clearly understood BEFORE deciding what to do with surplus funds. You should also reach out to the association’s attorney if there is any doubt regarding the path the board would like to pursue.
Ultimately, deciding what to do with a budget surplus is a difficult decision that depends on the specific needs and goals of the community association. Regardless of what option you’re considering, remember to check your governing documents and state statutes. In North Carolina, for example, the surplus must be refunded to the members if the governing documents are silent on the issue. In South Carolina, the matter of surplus funds is left to the governing documents, as the Horizontal Property Act and Homeowners Act are silent on the subject.
As we said earlier, many boards decide that the best option is to spend money on improvements to the community. This decision will not only benefit current owners, but it also has the potential to attract new owners and increase property values. Additionally, surplus funds that aren’t spent may be considered taxable income, something the board would likely rather avoid.
Board members are responsible for being transparent about how community association funds are used. For example, surplus funds should be clearly shown on financial reports, and board members should take the time to
If your association is approaching the end of the year with a budget surplus, there are a few options for using the extra money. Before making any decisions, be sure to check your association’s governing documents and state laws and always be transparent with community members about where their money is going. By keeping these things in mind, boards can turn surplus funds into something that benefits the entire community.
Could your community use some help with its financials? Reach out to the experts at CAMS today for Trusted Guidance.
About CAMS
In business for over 31 years, CAMS is North and South Carolina's premier community management company. With experienced local managers in each of its nine regions, CAMS is dedicated to providing innovative solutions to the community associations it serves. Additionally, CAMS was featured on Inc. Magazine's 2022 Inc. 5000 list of the fastest-growing private companies in America. To learn more, visit www.camsmgt.com/choose-cams.