RESERVE FUNDS AND TAXES

Tax implications may bear on the size of your reserve, says Abe Kleiman, a partner at the CPA firm Kleiman & Weinshank. Problems can arise if the reserves are deemed excessive and tax officials argue that its primary purpose is to generate additional funds.
That income, known as non-patronage income, is dealt with separately from a co-op's main sources of income, such as maintenance and possibly rent from a commercial space.

To help offset these implications, you should undertake a study of future repairs to the building's components, such as elevators, roof and boiler, and estimate what the replacement cost could be. Essentially, you want to create a 10-year capital budget. While a new building may have very few estimated costs for future repairs, a 50-year-old building could have a large estimated outlay, Kleiman says — and this capital budget helps justify the reserve fund's investment income.

While expenses related to that non-patronage income, such as advisor or portfolio-manger fees, are tax-deductible, none of the building's general expenses can be used to offset any tax liability.

If, in either case, your investment income is still large enough after expenses to be subject to tax — we should all have such problems — you may want to consider tax-exempt investments, such as municipal bonds.

— Theodore Joel