FREQUENTLY ASKED QUESTIONS
Audit & Financial Reporting
What is an audit, and why might our association need one?
An audit provides an independent assessment of your association’s financial statements, offering reasonable assurance that they are free from material misstatements. Audits are often required by governing documents, state laws, or lender requirements.
How long does an audit typically take?
The duration varies based on factors like the complexity of your association’s finances, the completeness of records, and responsiveness during the process. Typically, audits can take several weeks to complete.
What documents are needed to complete an audit?
Essential documents include:
- Year-end financial statements
- General ledger
- Bank statements and reconciliations
- Aged receivables report
- Board meeting minutes
- Reserve studies
- Budgets
- Governing documents
Prior year audit and tax returns.
What is a bank confirmation?
A bank confirmation is a request sent to your bank to verify account balances and other details as of a specific date. It’s a standard audit procedure to confirm the accuracy of your association’s financial records.
When should we sign and return the engagement letter?
It’s advisable to sign and return the engagement letter before the fiscal year-end to ensure timely commencement of audit and tax procedures.
Why might audited financial statements differ from internal reports?
Audited statements may include adjustments to align with Generally Accepted Accounting Principles (GAAP), such as recognizing prepaid expenses, accruing liabilities, or adjusting for doubtful accounts.
Tax & Compliance
What is Form 1120-H, and who should file it?
Form 1120-H is a federal tax return specifically for homeowners associations. It allows associations to exclude exempt function income (like member assessments) from taxable income. Most residential associations qualify to file this form.
When should an association consider filing Form 1120 instead?
Form 1120, the standard corporate tax return, might be beneficial for associations with significant non-exempt income or those not meeting the qualifications for Form 1120-H. However, it comes with stricter compliance requirements and potential risks.
Are donations to our homeowners association tax-deductible?
Generally, no. While your association may be a non-profit, it’s typically not a qualified charitable organization. Therefore, contributions are not tax-deductible for donors.
Why does our association need to pay taxes if we're non-profit?
Being a non-profit doesn’t exempt your association from all taxes. Income from non-member sources, like interest or rental income, is usually taxable.
What are estimated tax payments, and why are they important?
Estimated tax payments are periodic payments made to the IRS to cover anticipated tax liabilities. They help avoid underpayment penalties and ensure compliance with tax obligations.
General Inquiries
Can donations to our homeowners association be deducted on personal tax returns?
No. Even if your association is a non-profit, it’s not recognized as a charitable organization by the IRS. Therefore, contributions are not tax-deductible for individuals.
What is an allowance for doubtful accounts?
It’s an accounting estimate of receivables that may not be collectible, helping present a more accurate financial position by anticipating potential losses from unpaid dues.
What is accrual accounting compared to modified accrual and cash basis accounting?
- Accrual Basis: Records revenues when earned and expenses when incurred, regardless of cash flow.
- Modified Accrual: Combines elements of accrual and cash basis, often recording revenues when earned and expenses when paid.
- Cash Basis: Records revenues and expenses only when cash is received or paid.