IRS Revenue Ruling 70-604 for Community Associations

This Revenue Ruling is considered one of the most powerful tax planning tools available to an Association. The purpose of this ruling is to allow condominium/homeowner associations to avoid taxation on its excess membership income by either carrying over the excess income to the following tax year or refunding the excess income back to association members. This Revenue Ruling is applicable only to those Associations that file as a regular corporation (Form 1120).

IRS guidelines allow homeowners associations the option to elect filing taxes as a regular corporation (Form 1120) or as a Homeowners Association (Form 1120-H). The most significant difference between these two forms is that Form 1120 taxes the association on all excess income at a graduated rate starting at 15%. Form 1120-H taxes the association on all non-exempt income at a fixed rate of 30%. Exempt income on an 1120-H would include revenue generated to maintain the common property and pay for the general operations of the association. Non-exempt income includes revenue such as interest generated from investment accounts, special user fees, and laundry/vending machine income.

It is recommended that most associations should make a 70-604 election every year even if they later determine they will not elect to be taxed as a regular corporation. If circumstances dictate that this election would not apply in a given year, the resolution is simply ignored.

An association must strictly comply with the requirements of the Revenue Ruling to make this election. These requirements are as follows:

1. It must be adopted by vote from the association's membership prior to the filing of the tax return.

2. Election must be noted in writing as part of the board meeting minutes.

In addition, the attached resolution indicates that any excess membership income will be applied to next year's dues, which is in lieu of returning the excess money to the individual association members.

Aaron Anderson - Manager of Accounting Operations
Association Division
aaron.anderson@tmgnorthwest.com



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The Management Group
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