As evidenced by the increase in advertisements from H&R Block, Turbo Tax and your friendly, local accountant, it’s clear that we have entered “refund season” – AKA time to file your personal taxes.
But, don’t forget that it’s also tax time for your association.
Your community association is considered a business, and, while you are a Not-For-Profit, you still need to file taxes as any other corporation would. Being a nonprofit is different than being tax-exempt, and IRS Form 1120 or 1120H must be completed and filed annually for the federal government, as well as you state’s required form (in Illinois, it is the IL-1120, your CPA can advise what your state needs filed).
A community association’s state and federal tax returns are due 75 days after the end of its tax year, which is March 15 for a community with a December 31 year end. For most associations, little or no taxes are owed to (or expected to be refunded from) the IRS, because only “non-member” income— like interest, laundry room, or rental income—is taxable; however, lack of taxable income does not eliminate the need to file.
A basic preparation is fairly inexpensive; if you are behind on approving your bids for this service, most CPAs will file an extension at no additional cost in order to allow sufficient time for your taxes to be prepared prior to the due date, but they must know they will be performing this service before they can file your extension.
You may be asking: What about an audit? There are currently no federal laws regulating the frequency with which a community association must perform an audit, though there may be certain times, when your community is obtaining a bank loan, for instance, that they are required. State laws on audit requirements can vary; you should check with your professional community association manager or your CPA for your local requirements. You should also check your community’s governing documents to ensure they do not regulate if or when your association must perform an audit.
An audit is an external verification of the accuracy and completeness of your community’s financial records, and is recommended every few years as a good business practice. While Associa performs their own internal audits to ensure checks and balances are being utilized, these internal audits do not verify your community’s vendor transactions and balances. Your auditor will review projects approved in your minutes against signed contracts and against what was paid to vendors. They also independently verify bank balances and payments made to vendors.
Even for community associations without large investments and outside income, audits generally range from $1,000-$2,000. Smaller communities with limited budgets look for other options to have an external verification completed. Most CPAs will also offer the options of reviews or compilations.
A review is a less-thorough evaluation of a community’s financial activities, and, while not as detailed as an audit, it does review the financials in comparison to the budget and any unusual items or changes. While some associations are lucky enough to have board members with a financial background, most communities will benefit from having a professional look over their financials and advise of any red flags. While management should be providing you with your monthly financials, an independent review by a CPA can provide verification to the board ensuring that management is doing their work properly.
A compilation is a preparation of year-end financial statements, based on the information provided by the association and management. As the compilation is done based off of the same expenses and bank balances that management has, the primary purpose is to confirm that the year-end financials prepared by management are accurate. It does not confirm whether any of the initial numbers are correct or whether payments made match contract amounts, so the CPA cannot make any statements about the accuracy or completeness of the financial statements.
If your community is interested in an audit, review, or compilation, your professional community management team can contact CPAs that specialize in community associations and have them provide proposals for your association.
Some definitions in this article were adapted from the Community Associations Institute’s M-100 Participant Guide, ©2003.
ABOUT THE AUTHOR
Lea Marcou, CMCA, AMS, PCAM has worked in customer service for over 15 years. She started with Associa Chicagoland in 2008, and then transitioned from Customer Care Representative to Community Association Manager in 2010. She has worked with a diverse portfolio of properties, including mid-rise condos, townhomes, single family homes and developer and commercial properties. She is an active member of the Community Associations Institute, where she attends industry events, seminars and trade shows. Lea has obtained her CMCA® and AMS® designations, and was recently awarded the prestigious PCAM designation. Contact her at 847-490-3833 or Lea.Marcou@associa.us.