Surplus Funds

Even in these economically troubled times, your association may end its fiscal year with an operating surplus. A tight fiscal belt, lower than expected delinquency rates, expense deferrals; whatever the reason, surplus operating funds do occur.

What do we do with surplus funds and why do we even care? The common practice for most associations has been to either carry forward surplus funds from one fiscal year into the next, or transfer them into the reserve account and refer to this as an additional members’ contribution.

Colorado law requires that, unless the declaration provides otherwise, any surplus funds, after common expenses and regular reserve contributions have been paid, shall be returned to the unit owners or credited to them to offset future regular assessments. From an IRS standpoint, either way is acceptable, but your choice must be achieved by a resolution of the members, usually done so at the annual meeting of the members. A correct accounting of any surplus funds is necessary on your financial statements.

An attorney prepared resolution by one of the following methods will officially recognize and administer surplus funds:

  • Refund the excess by check or a credit to each owner’s specific account as a percentage of the surplus equal to the allocated share in the common elements.
  • Record the surplus more generally as a “prior year’s operating surplus” line item in next year’s budgeted income, thereby offsetting the amount of regular assessments needed.
  • Expense the surplus from operating as corresponding income to the reserve fund in the current year and incorporate the additional funds into the reserve study funding plan.
  • Amend the declaration to retain any surplus funds either as operating or reserve funds. This will require a 67% vote of the membership to amend the declaration but will serve as a more permanent disposition of any future surplus operating funds.

For the board to simply dispose of any surplus operating funds at will is not enough to satisfy both IRS and Colorado State requirements. Some foresight and preparation is necessary to avoid potential tax implications and a potential violation of state laws.