Condo Media - November 2016 - 27

Ken Bloom, CPA,
Principal in Bloom
Cohen Hayes, LLC
Bloom agrees with the
basic premise behind this
"industry perspective": Association
boards often have "unrealistic expectations" about what their managers
should know and do. "They expect their
manager to be a lawyer, an accountant,
an insurance agent, and a plumber. And
no one person could possibly have in
depth expertise in all of those areas."
Although most managers are aware
of their limitations, some "don't know
what they don't know," Bloom says.
And he's seen many situations in which
these managers have oﬀered advice
they weren't qualiﬁed to give, with unfortunate results for the managers and
their clients.
One manager advised a board, incorrectly, that rental income the association earned would not be taxable. In

fact, income from sources other than
fees and assessments paid by owners is
taxable, Bloom notes, and this association ended up with "a huge tax bill" for
which it had not planned.
This is not the only example of a
manager failing to recognize that "condominiums are very complicated from
a tax perspective," Bloom says. He's
dealing with a situation now, "probably
the ugliest I've encountered," in which
the association, following the manager's
advice, has been ﬁling the standard condominium association tax form (1120h)
for the past 15 years. The manager
wasn't aware that in order to ﬁle that
form, an association must meet a residential test-no more than 15 percent
of its space can be commercial. This association, with a 45 percent commercial
space ratio, didn't meet that test, and
now faces a signiﬁcant back tax bill-and
an even larger potential state tax liability as a result.

The state liability arises because of
another tax detail unknown to this manager: Since 2009, Bloom explains, Massachusetts has required condominiums
that don't meet the federal residential test
to ﬁle a corporate return with the state,
involving a tax on both the association's
income and its net worth, which for this
association, Bloom notes "is quite high."
How large the ﬁnal bill turns out to be will
depend on how far back the state goes in
calculating the back taxes and penalties.
"This is a very large and costly
mistake," Bloom says, but the company
faces an even larger loss. "The association board is working on an RFP for a
new management company."

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Condo Media - November 2016

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