"We are a townhome association. We have quite a large sum of money in our reserve account which we do not anticipate using in the near future. We would like to invest it but are wary of the taxes we might have to pay as a result. Do you have any suggestions or advice for our association?"
Your question is one that comes up a lot. First you have to understand that depending on the way your file your association's tax returns, (Regular Corporate tax returns,(form 1120) or Homeowners tax returns, (form 1120-H)), you may or may not have to pay taxes even if you receive additional investment income. Each association has different circumstances and the answer will vary depending on the specific tax situation. If you are paying taxes and you are filing the Homeowners tax your tax rate for federal income tax purposes is 30%. This means that you keep at a minimum 70% less the state tax which is approximately 7.25% in Illinois. If you have directly related expenses such as bank fees or interest expense or a portion of the management fee to record the transactions or to manage the investments, the effective tax rate is less. There are tax free investments such as tax free municipal bonds or tax free municipal bond funds. However they generally will make sense with a higher tax rate. Some are double tax exempt. Exempt from federal and Illinois taxes. These municipal bonds have even a lower rate of interest.
So, what I would recommend, unless there are special tax circumstances is a safe investment that has the highest yield. You can look at Certificates of Deposit and ladder them to have staggered maturities. You will need to look at the yield curve to determine how far out the maturities should go. If the yield curve is flat, you will end up tying up your money for a long time without a much better interest rate. Your banker can assist you in setting up a program.
Brad Schneider CPA
Certified Financial Planner
(A division of Schneider, Cupuro & Associates)
Certified Public Accountants