What is the difference between an audit, review, and compilation?
  • Audit obtains a high, but not absolute, level of assurance about whether the financial statements are free of material misstatements. Provides an opinion as to whether the financial statements present fairly, in all material respects, the association’s financial position, results of operations and cash flows.
  • Review obtains a limited assurance that there are no material modifications that should be made to the financial statements. No assurance provided to the user of the financial statements.
  • Compilation does not obtain or provide any assurance that there are no material modifications that should be made to the financial statements.
What is needed to begin my audit, review, or tax return?

Before we can begin work we will need a signed engagement letter/proposal.  We will also need your year-end financial packet, latest reserve study, prior-year audit and taxes, governing documents, Board meeting minutes, budget, and communication with the previous auditor as needed.

What is an engagement letter/proposal and why do I need one?

An engagement letter is a proposal that has been signed by an authorized member of the board and outlines the services we will be providing and our fee.  We are required to have an engagement letter to clearly set expectations so our business relationship will be free from misunderstandings.

What is Form 3500 and why do I need one?

California Franchise Tax Board Form 3500 is an application for exempt status.  This application needs to be approved by the California Franchise Tax Board for your organization to be exempt from minimum franchise tax of $800 per year.

How do I know which service my association needs?

Unless the governing documents impose more stringent standards, a review of the financial statements of the association shall be prepared in accordance with generally accepted accounting principles by a licensee of the Board of Accountancy for any fiscal year in which the gross income to the association exceeds seventy-five thousand dollars ($75,000).  A copy of the review of the financial statement shall be distributed to the members within 120 days after the close of each fiscal year, by individual delivery pursuant to Section 4040. [2012- Based on former §1365(c)]

When is my Audit, Review, or Tax Return due?

Your audit or review is 120 days from your association’s year end.  Tax return due dates depend on the financial statement filed by CPA.

What is a representation letter and final audit?

Upon completion of the draft audited financial statements, the board reviews the audit report together with a representation letter. The client representation letter confirms management’s and the board’s representations, oral or implied, together with a statement that all information, documents, and support have been made available during the audit.  Upon board signature, the auditor will release the final audit report for distribution to members.

What is Revenue Ruling 70-604 and how does it affect my association’s tax liability?

This ruling allows Common Interest Realty Associations to remove excess membership assessments from taxable income.  This election must be made before the tax return is filed and preferably before the end of the association’s fiscal year.

My association already has a CPA firm, what is the process to switch firms?

Contact us for an engagement letter/proposal and present it for Board of Director’s approval.  Upon receipt of the signed engagement letter we can proceed with the engagement.

Why does my association have to pay taxes, I thought it was a non-profit?

Most associations pay income tax on income from non-membership sources, such as bank interest income.

Can my association deduct expenses related to the production of income?

Associations deduct a portion of certain expenses paid throughout the fiscal year against taxable income.

Forms required by the federal government?
  • Form 1120-H: There is a lower compliance risk with this form.  Exempt function income is not taxable.  There is no requirement for Revenue Ruling 70-604.  The tax rate is 30%.
  • Form 1120: Income is taxed at regular corporation rates.  You may be able to make an annual election to defer excess income (Revenue Ruling 70-604).  Risk of compliance is higher with this form.
  • Form 990: Most homeowners’ associations do not qualify to file this form. File a form 990 if the IRS has determined 501(c)(3), 501(c)(4), 501(c)(7) status.
Forms required by the State of California?
  • Form 100: This form is used when filing federal form 1120 or 1120-H. California code for exempt associations (Federal 1120-H) only applies to associations approved for exemption (Form 3500).

- Specific deduction $100 per year
- California minimum tax of $800 per year does not apply for California exempt Organizations
- Must file form 100 annually to report taxable income
- Must file form 199 annually

  • Form 199:  This form is the California Exempt Organization Annual Information Return. It is used by organizations granted tax-exempt status by the California Franchise Tax Board.  Requires a $10 annual filing fee.