Coming from New York means you live in a condo or a home within a community, most likely you have a responsibility to contribute to assessments to a homeowners association (HOA) or a condominium association.
Funny enough, if by any chance you are asked if your HOA submitted last year’s tax returns, your straight answer will be, “Do we have to?” Many New York homeowner associations and condo associations even don’t know about the requirement to file tax, and not knowing means not filing.
Roughly about 25% HOAs don’t file, and if they file, they are using a wrong process. Here is how to go about and get your association back on the right track.
New York HOA and Condo Association: To File or Not to File
Condominium associations are managed by New York’s Condominium Act while homeowner associations fall under non-profit corporations, subjecting them to New York’s Not-for-Profit Corporation Law.
You should know that all corporations must file tax returns, including condo associations and HOAs, therefore there is no argument about whether to file or not to file, it is mandatory. This point can often be confusing even for a CPA.
One very rare case to avoid filing is to apply to be a Non-Profit entity under section 501(a)(4), form 990. However, it requires a lot of investing in research, paperwork and time trying to persuade IRS. You must produce evidence showing that areas owned by a homeowner association like park lands and roadways are actually used by the general public and not limited to their members only.
If by any chance IRS accepts your application, you will be privileged to use your funds to improve your community, and general maintenance, for the good of the general public of course. Homeowner association could even receive state funds to help maintain these areas.
Options for New York HOAs and Condo Associations
New York COAs and HOAs have two options to file their tax returns; they could file using Form 1120, which is a traditional corporate method. While it boasts an advantage of being flexible with the expense allocation, (they do not have to maintain the 90% rule), and lower tax rates, (15% tax rate for the first $50,000 of their taxable income), they do not favor HOAs.
First, all HOA’s income becomes taxable; any funds set aside or in excess of expenditure will be taxed. Second, they have proven to be complex, requiring some level of accounting and bookkeeping that most HOAs do not keep and third, HOAs 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. A cost template can help.
Most New York HOAs elect to use the second option, to be taxed under section 528 of the IRC, and to file Form 1120–H instead of Form 1120. To qualify for this treatment, condo associations and HOAs must meet the following criteria:
- 60% of revenue is gained from members and not the sale of goods and services.
- 90% of its expenditure is on operations and maintenance of the property.
- 85% of units should mostly be used as residences.
- Annual residual income must not be used to benefit association members.
Filing Form 1120–H means most of the HOA’s income is not taxable. Income is tax exempt if generated from; association dues and assessments, fines and fees from Architectural Control Committees, late fees, and interests on late assessment payments, and resident clubhouse and other facility rentals.
Certain incomes are taxable, but the association is allowed to carry forward the excess to offset future payments. Taxable association income is generated from; interest from banks and dividends, guest fees, such as golf-course usage, renting facilities like clubhouse, and payment for easements, like cell towers.
Expenses incurred only to generate the taxable are then deducted, with support from records availed. A $100 deduction is allowed on taxable income, and a flat rate of 30% applied.
New York: Electing to File Form 1120-H
New York homeowner association elects to take advantage provided under section 528 by filing Form 1120–H annually, before its due date, including extensions. Once an association has filed Form 1120-H, revoking it will be impossible unless IRS consents to it. HOA will have to request IRS consent by filing a ruling request; a fee is applicable for every ruling request applied.
If HOA fails to file Form 1120–H by its due date, they get an automatic 12 months extension to make an election, after that 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.
Homeowner association or condo associations have the liberty to compare total tax payable by Form 1120 and with that payable by Form 1120-H and file the form with a lower tax. By filing Form 1120–H, most associations find themselves with a reduced tax burden.