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.

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• 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.

Hawaii associations are considered to be businesses for GET purposes. Accordingly, associations are subject to pay GET on gross revenue that is not specifically exempted from GET per one of the HRS exceptions. Since the tax is levied on gross revenue, expenses do not reduce the taxable amount of income for GET purposes. Member assessments and dues are exempt from GET per HRS 237-24.3(2). For more information on what income is exempt from GET, please see the following:

• HRS 237-24
• HRS 237-24.3
• HRS 237-24.5
• HRS 237-24.7
• HRS 237-24.75

GET has two portions that comprise the total percentage rate: the Base Rate and the County Surcharge Rate.

1. The base rate varies is either 0.5% or 4.0%—depending on the business activity in question. For HOA purposes, the 4.0% base rate applies.
2. The county surcharge rate varies depending upon the currently enacted rate for each county. Typically, these rates vary from 0%, 0.25% and 0.50%—and the relevant counties are:

1. 1. 1. 1. City and County of Honolulu
         2. County of Kauai
         3. County of Hawaii
         4. County of Maui

It depends on the facts and circumstances. For most associations, the answer is yes. If your association files Form 1120-H, Form 1120, or Form 1120-C then your association will have to file Form N-30 for its state income tax return. If your association files Form 990, then your association is automatically exempt from having to file Form N-30. However, if your association files both Form 990 and Form 990-T due to the presence of unrelated business income (UBI), then your association must file Form N-70NP for its state income tax return.

The calculation can get a bit complicated, but generally the following will apply:

• 4.4% à if Taxable Income < 25,000
• 5.4% à if 25,000 < Taxable Income < 100,000 … but subtract $250 from the 5.4% x Taxable Income
• 6.4% à if Taxable Income > 100,000 … but subtract $1,250 from the 6.4% x Taxable Income
• Note: Capital gain income is subject to a different calculation for state income tax purposes. The tax rates are the same, but the application of those tax rates differs.

State income tax return

1. Form N-30 à This tax return must be filed on or before the 20^th day of the fourth month following the close of the taxable year. Hawaii allows for an automatic six month extension of time to file. This extension does not apply to payment deadlines.
2. Form N-70NP à This tax return must be filed on or before the 20^th day of the fourth month following the close of the taxable year. Hawaii allows for an automatic six month extension of time to file. This extension does not apply to payment deadlines.

 

GET return

1. Form G-45 – Periodic GET Return

1. 1. 1. 1. Monthly filers (you must file monthly if you will pay more than $4,000 in GET per year) à Due on or before the 20^th day of the calendar month following the end of the filing period. No extensions are allowed.
         2. Quarterly filers (you must file quarterly if you will pay $4,000 or less in GET per year) à Due on or before the 20^th day of the calendar month following the end of the filing period. No extensions are allowed.
         3. Semiannually filers (you must file semiannually if you will pay $2,000 or less in GET per year) à Due on or before the 20^th day of the calendar month following the end of the filing period. No extensions are allowed.

1. Form G-49 – Annual GET Return

1. 1. 1. 1. This is the annual GET return that must be filed in addition to your Form G-45 periodic GET returns.
         2. It is due on or before the 20^th day of the fourth month following the end of the tax year.
         3. You may request an extension of time to file using Form GEW-TA-RV-6, but this extension is not automatic—meaning, it must be approved. An approved extension only extends the time to file, not pay. An estimated payment due must be submitted with your extension request.

• 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.