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From 1120H - New construction 2 unit condo (NJ)

Started by VinyakP • 17 replies • 359 views

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VinyakP (New Jersey)
Posts: 11
Posted:
My neighbor and I run a 2 unit self managed HOA . It's a straightforward HOA - we each pay our HOA fee into a joint business account and use that to pay our shared insurance, water bill, electricity for garage , reserves and any other joint expense for the building. At the time of closing, we both had to make a contribute additional one time payment to the HOA along with the builder as it was a new construction.

We are trying to figure out what exactly we need to do for Form 1120H in the current tax season.

My questions are as follows:

1. Do we need to take the reserves fund out while calculating the expenditures made in row C of the form?

2. Is there a CPA who would be able to do this for us for a reasonable fee.
TimB4 (Tennessee)
Posts: 21,062
Posted:
CPAs charge what they charge.

This is what we do (as we understand the instructions):

Item A Type of Homeowners Association: Residential Real Estate Association

Item B Total Exempt Function Income: Amount = Total Income less(minus) Interest Earned and money transferred from Reserves (savings) into Operating Fund (checking)

Item C Total Expenditures for 90% Test: Amount = Total Expenses less(minus) money transferred to Reserve funds(savings) and any donations made or gifts given (example: donation or flowers provided for a death in a members family).

Item D Total Expenditures for Tax year: Amount = Item C plus (add) any donations made or gifts given.

Item E Tax Exempt Interest Received: Typically Zero ( 0 )
unless the Association has money invested in municipal bonds.

Line 1 Dividends: Typically Zero ( 0 ) unless Association has invested in Stocks/Bonds. If invested in Stock/Bonds refer to 1099-div received

Line 2 Interest: Enter amount of interest earned from Bank (shown on 1099-int)

Line 3 through 7: Typically Zero ( 0 )

Line 8 Gross Income: Amount = Addition of lines 1 though 7

Lines 9 though 16: Typically Zero ( 0 ) (if you have employees, follow instructions)

Line 17: Amount = Line 8 less(minus) line 16

Line 18: $100

Line 19 through 26: Follow form instructions

VinyakP (New Jersey)
Posts: 11
Posted:
Thanks for getting back! Appreciate it!

We just have a checking out; No savings account yet.

Can you please help me with,

1. Do we need a separate savings account for reserves or we can keep everything in the checking account?

2. If reserves are added to the checking account can I deduct them from the expenditure so that ut satisfies the 90% test.
VinyakP (New Jersey)
Posts: 11
Posted:
Ours is a condominium
TimB4 (Tennessee)
Posts: 21,062
Posted:
To my understanding, there is no requirement to keep reserve and operating funds separate.

Many Associations do have them separated, checking for operations and savings for reserves.
This is done for the following reasons:

1) Savings earns more interest then checking
2) Having them separate can minimize the risk of board members thinking there is plenty of money (granted with just two of you, not that big of a concern).
3) Easier Bookkeeping.
Everything is deposited into checking and paid from checking. Reserve expenditures are paid from checking with funds from savings transferred to cover the amount.

With all of that said. My present Association just opened a savings account for reserves after 20 years.
Prior to that, the funds were co-mingled.

TimB4 (Tennessee)
Posts: 21,062
Posted:
Quote:
Posted By VinyakP on 01/24/2024 12:25 PM

2. If reserves are added to the checking account can I deduct them from the expenditure so that ut satisfies the 90% test.

Yes, as long as those funds are earmarked for reserves.

I would recommend getting a savings account just for the ease of bookkeeping.

TimB4 (Tennessee)
Posts: 21,062
Posted:
So for your Association it would be:

Item B Total Exempt Function Income: Amount = Total Income less(minus) Interest Earned and minus Reserves

Item C Total Expenditures for 90% Test: Amount = Total Expenses less(minus) money tagged as Reserves and any donations made or gifts given (example: donation or flowers provided for a death in a members family).
TimB4 (Tennessee)
Posts: 21,062
Posted:
Remember that you need to include a balance sheet with the tax return.

You don't have to identify accounts (kept in savings/checking).
You simply need to identify money saved for reserves/spent from reserves.
LetA (Nevada)
Posts: 2,679
Posted:
Are you still under declarant control? If you are still under DC, they have to do the taxes as a for-profit corporation.

If you are not under DC, You should be able to find a CPA that can do the taxes for you from $250-$500.
They may even be able to advise you on tax-saving liabilities.
TimB4 (Tennessee)
Posts: 21,062
Posted:
Quote:
Posted By LetA on 01/24/2024 1:05 PM
Are you still under declarant control? If you are still under DC, they have to do the taxes as a for-profit corporation.

Not necessarily.

If the declarant created/incorporated the Association and didn't co-mingle funds (declarants and the Associations) they should still be able to file 1120-H
VinyakP (New Jersey)
Posts: 11
Posted:
Can you please share the balance sheet template. Sorry I am new to this and still learning.
VinyakP (New Jersey)
Posts: 11
Posted:
Do we need to provide a balance sheet?

In the letter that IRS provided the EIN , they asked only for the Form 1120H.
TimB4 (Tennessee)
Posts: 21,062
Posted:
I had been told you needed a balance sheet as supporting documentation.

However, I do not see that in the instructions (anymore) and per the following article, it's not required:

Form 1120-H - The Tax Lady
MarkS42 (North Carolina)
Posts: 70
Posted:
I am not sure if you would also need to file CPT-100 with the State of New Jersey. The federal 1120H is fairly straight forward. In NC, there is no simplified equivalent of 1120H and we file CD-405 with the State. I would recommend getting a CPA for at least the first year and see what are the federal and state requirements for New Jersey. You then have a template that you can use for the next year.
VinyakP (New Jersey)
Posts: 11
Posted:
Can you please get back to me how to handle the below scenario for Item B and C.

Scenario:
At the time of closing, each condo owner had to make an additional one time HOA contribution which was 2 months of HOA fees. The builder also provided a one time contribution amount.
We deposited those checks in the checking account at the time of account opening.

Currently:

Item B Total Exempt Function Income: Amount = Total Income less(minus) Interest Earned and minus Reserves

Item C Total Expenditures for 90% Test: Amount = Total Expenses less(minus) money tagged as Reserves and any donations made or gifts given (example: donation or flowers provided for a death in a members family).

Really appreciate your inputs.
VinyakP (New Jersey)
Posts: 11
Posted:
Makes sense. Do you have any recommendation for a CPA?
TimB4 (Tennessee)
Posts: 21,062
Posted:
I would consider all of those funds as assessments (classified as a special assessment, which doesn't matter to the IRS)

Owner A & B paid $200 as an annual assessment. As it got time to close, Owner A & B paid $300, the Builder (who was an owner until closing) also put in $300 The Association transferred $900 to the reserves. The Association earned $2 in interest. The Association gave a $5 dollar gift card to the builder as a thank you.

Item B: Total Income: $400 ($200 x 2 owners plus $300 x 3 closing funds plus $2 interest = $1,302 minus $900 placed into reserves minus $2 in interest)

Hence, you meet the exempt function income test "Exempt function income consists of membership dues, fees, or assessments . . This income must come from the members as owners, not as customers, of the association's service"

Item C: Total Expenses: $200 (admin costs as you don't count the money transferred into reserves)

Item D: Total expenses $205 (all expenses spent minus the $900 transferred to reserves).

Hence, you meet the 90% expenses test (200 divided by 205 multiplied by 100 = 97.5% )

Item E: $2 (the interest you earned)

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