Owning a home or a property within a planned community in most cases means you are a member of a Homeowners Association (HOA), and chances are that you are one among many who are confused about how HOA should be filing taxes or not.
You must also be wondering how the HOA management should file these taxes, and penalties to be faced if they fail to file. Well, this article will help clarify the confusion related to tax reporting for Homeowners Associations.
New Jersey HOA Tax Requirements
Homeowners associations are considered corporations and must file taxes just like any other corporations across the country. Most HOAs are created as non-profit corporations but are still taken as a normal corporation for taxation purposes.
There are rare cases where HOA’s application to be recognized as non-profit by IRS, but are expensive and quite difficult to obtain, and are requested through filing Form 1024 with the IRS while maintaining section 501(c)(4).
New Jersey HOA Filing Options
Your association has two options when filing tax returns; one is to file as a normal corporation, using Form 1120. This option is generally disadvantageous to HOAs. By filing Form 1120, HOA put all its income to be taxable; any funds set aside or in excess of expenditure will be taxed.
Form 1120 has also proven to be complex, requiring some level of accounting and bookkeeping that most HOAs do not keep. They are also required to make an estimate of their payable tax, and as pointed out that they lack a level of bookkeeping, will be a hard task to accomplish.
New Jersey Condo Association Filing Options
To avoid all these, HOAs have the privilege to avoid Form 1120. Section 528 gives Homeowner Associations option to fill Form 1120–H if they accomplish certain requirements. Form 1120–H is designed specifically for HOAs and is much easier to understand, just one page.
The requirements are that:
- 60% of HOA’s annual revenue must fall under exempt-function income, meaning that they are generated from owners who are members and not as customers.
- HOAs should also ensure that 90% of its expenditure is on capital expenditure, maintenance, and management expenses.
- The units within the community should mostly be used as residences, more than 85%.
- Annual residual income must not be used to benefit association members.
If a homeowner association qualifies to file Form 1120 – H, then they will only be taxed on the non-exempt income. The non-exempt income is generated through interests from banks and other reserves, and other for-profit activities, such as renting out a clubhouse, the vending/laundry machine income or golf-course fees.
Expenses used solely to generate the non-exempt income are then deducted; records to support these expenses should be available. Homeowners associations are allowed a $100 deduction on taxable income, and a flat rate of 30% applied.
Tax Tips for New Jersey HOAs and Condo Associations
An election to file Form 1120 – H is done annually, before its due date, which is the 15th day of the third month after a tax year; to revoke an election requires the consent of IRS. However, if HOA fails to file Form 1120 – H within one year of its due date, they may lose the chance to file Form 1120 – H that year and be forced to file Form 1120 and incur penalties on late tax payment.
By filing Form 1120–H, most associations find themselves filing very minimal taxes. The tax burden is reduced, but they must be filed.
We serve the following New Jersey HOA and condo association communities:
Newark, Jersey City, Paterson, Elizabeth, Clifton, Trenton, Camden, Passaic, Union City, Bayonne, East Orange, Vineland, New Brunswick, Hoboken, West New York, Perth Amboy, Plainfield, Sayreville, Hackensack, Linden, Kearny, Fort Lee, Atlantic City, Fair Lawn, Princeton, Garfield, Long Branch, Westfield, Rahway, Englewood, Bergenfield, Millville, Paramus, Ridgewood, Cliffside Park, Lodi, Bridgeton, South Plainfield, Carteret, Summit, North Plainfield, Roselle, Secaucus, Glassboro, Palisades Park, Elmwood Park, Pleasantville, Morristown, Hawthorne, Point Pleasant, Rutherford, Dover, Harrison, Dumont, Tinton Falls, Lindenwold, New Milford, South River, Madison, North Arlington, Asbury Park, Ramsey, Tenafly, Fairview, Phillipsburg, Hopatcong, Hammonton, Highland Park, Collingswood, Metuchen, Middlesex, Roselle Park, New Providence