What information do you need to provide a proposal?

• • A recent monthly financial statement
  • Prior year audit
  • Litigation – extent of
  • Is there a special assessment?
  • Is there a loan?
  • Is the association under developer control, phasing, subsidized?
  • Was there a change of accounting/management during the year?
  • Are all documents available?

The objective of an audit is to provide an opinion about whether the financial statements present information fairly, in all material respects, and in conformity with applicable reporting standards, e.g., Generally Accepted Accounting Principles, or other principles such as the cash basis.

The auditor opines on whether financial statements are free of material misstatement, or materially correct. Auditors provide a high level of assurance but not an absolute level of assurance.

Generally Accepted Auditing Standards (“GAAS”) requires auditors to corroborate amounts and disclosures in the financial statements to sufficient audit evidence, which may include inquiry, physical inspection, observation, third-party confirmation, examination, analytical review.

The time we spend on an audit varies depending on several factors:

• • • Association complexity
    • Assistance from association/management company
    • Completeness of records and how long our client needs to collect all required audit evidence.

• Financial statements for the last month of the year
• General ledger for the year
• Bank statements and reconciliations
• Aged receivables report
• Subsequent period financials, check register, general ledger
• Access to vendor invoices
• Board meeting minutes
• Reserve study
• Budget
• Governing documents
• Prior year audit and tax returns
• Specialized
  • Special assessment – ratification/resolution, payment options, purpose,
  • Loan – agreement and statement
  • Developer assessment, phasing, subsidy agreements, calculations, invoices
  • Shared cost – agreement, calculation for association’s share of costs/amounts billed

A bank account confirmation is a request from the auditor to the bank for bank account balances as of the date of the balance sheet (year-end). The confirmation must be signed or authorized by a signer on the account(s) and returned to the auditor, who will then forward the confirmation request to the bank.

Prior to year-end and as soon as possible, we can’t start our audit & tax procedures until this is received!

We will complete the draft financial statements upon completion of our testing, which includes obtaining sufficient audit evidence and appropriate responses to inquiries.

Generally upon receipt of a signed representation letter from management and the board of directors.

(contracts@hoacpa.com)

• There are typically audit adjustments in order to present the financial statements in accordance with Generally Accepted Accounting Principles.
• Examples of audit adjustments include converting from cash to accrual basis, recording prepaid expenses, accruing expenses, tax provision, allowance for doubtful accounts (delinquent assessments).

An allowance accounts for owner delinquencies where there is doubt regarding the collectability of outstanding balances. The allowance is a contra receivables account which when combined with assessments receivable provides a reasonable estimate of the collectible receivables.

• The accrual basis of accounting records revenues when earned and expenses when incurred.
• Typically, modified accrual accounting for associations records revenues when earned (accrual) and expenses when paid (cash basis).
• Under the cash basis of accounting, revenues are recorded when cash is received, and expenses when they are paid.

• Extensions:
  • Payments to be credited to cover current year’s tax liability
  • Provides extended time to file but not to pay
• ETP’s:
  • Payments to be credited to cover the upcoming year’s tax liability
  • Failure to make ETP’s may result in an assessment of underpayment penalties and interest

Tax Cuts and Jobs Act signed into law 12/22/2017 changed the tax rate for Form 1120 to a flat 21% applied to all levels of taxable income (no longer a graduated rate)

• Used as a credit towards the upcoming year’s tax liability
• Taxable income will most often increase as the years go by
  • liability for next year > liability of current year
• Overpayment reduces the subsequent year’s required estimated tax payments

• Transmittal letter attached to the tax returns contains detailed instructions on how and when to file the tax returns
• Remit tax payments as detailed on the transmittal letter
• Signed Efile documents (aka Forms 8453) are sent back to CPA for California returns (100+199) to be e-filed
• Form 1120H must be signed and mailed directly to the IRS by the Board
  • Cannot be e-filed
  • Keep a copy of signed return in your records
• Form 1120 -efiled – sign Form 8453-C and return to CPA for efiling
• Form 990 – efiled – sign Form 8453-EO and return to CPA for efiling

• The association will be subject to the $800 minimum tax in California
• File Form 3500 with the FTB to re-apply for Tax Exempt Status
• Pay the tax notices from California – the $800 payments will be refunded once tax exempt status has been granted
• Is my association exempt from income tax?
  • Most associations are not exempt from tax on income from non-member sources such as bank or investment income, gains on sales of assets, lease/rental income.
  • Excess income generally refers to the excess of operating income over operating expenses
  • For Form 1120-H filers, this does not present a tax issue. (Approximately 85% of associations in the US file Form 1120-H
  • For Form 1120 filers, members must approve IRS Revenue Ruling 70-604 to either carry forward excess income to the next year or return the excess to owners 
• What is Form 1120-H?
  • Federal tax return for residential community associations
• What is Form 1120?
  • Federal corporation tax return.  Used by commercial associations and some residential associations.  Lower tax rate than form 1120H, but higher risk
• Why does my association pay tax?
  • Usually because taxable income such as interest income exceeds allowable tax deductions.
• Why do I have to pay estimated tax?
  • Quarterly estimated tax payments are required by federal and state agencies
  • To avoid underpayment penalties and interest after the annual tax return is filed.

• Most associations are not exempt from tax on income from non-member sources such as bank or investment income, gains on sales of assets, lease/rental income.
• Excess income generally refers to the excess of operating income over operating expenses
• For Form 1120-H filers, this does not present a tax issue. (Approximately 85% of associations in the US file Form 1120-H
• For Form 1120 filers, members must approve IRS Revenue Ruling 70-604 to either carry forward excess income to the next year or return the excess to owners

Federal tax return for residential community associations

Federal corporation tax return.  Used by commercial associations and some residential associations.  Lower tax rate than form 1120H, but higher risk.

Usually because taxable income such as interest income exceeds allowable tax deductions.

• Quarterly estimated tax payments are required by federal and state agencies
• To avoid underpayment penalties and interest after the annual tax return is filed.