Revenue Ruling 70-604 was adopted by the IRS in 1970, so that homeowners and condominium associations would have the option to move excess member income forward to the next fiscal year for tax purposes, or to refund excess member income. Although refunds are likely not a good option for an association given continually rising costs and the need to adequately fund future repairs and replacements, the provisions of the revenue ruling allow the association the option to file the most cost-effective tax form.
What is the 70-604 election, and how is it made?
The Revenue Ruling 70-604 election is a tax election that documents the intention of the Association to consider utilizing the provisions of Revenue Ruling 70-604 when filing Form 1120. The Revenue Ruling 70-604 election is made by voting at a duly organized meeting of the membership of the Association, typically the Annual Meeting. The decision is NOT a Board of Directors decision; hence it must be made at a meeting of the entire membership. After the meeting is called to order, the election can be submitted to a vote of those in attendance at the annual meeting. If more than 50% of the members in attendance at the meeting vote in favor of the election, it passes.
Should an Association pass the 70-604 election if the Association generally files Form 1120H which does not use Revenue Ruling 70-604?
Yes, the election should be made by Associations that customarily file Form 1120H. There is always a chance the Association may want to file Form 1120 in any given year due to unexpected potentially taxable income. In this case, it is advisable to always make the election just in case the Association may want to take advantage of Revenue Ruling 70-604 when filing Form 1120.
Is there any potential liability to the Association in making the 70-604 election and voting on the election at the annual meeting?
No, there is no tax liability to the Association for making the election.
Best Practices for ALL Associations:
- Make the IRS Revenue Ruling 70-604 election a default business item on the agenda for EVERY annual meeting. If utilizing mail-in or electronic ballots, have the adoption of the ruling be a ballot item.
- Use an easy explanation for the membership and the board that adopting the Revenue Ruling 70-604 gives the CPA preparing the taxes the greatest latitude to utilize the most cost-effective tax form to file for the association, and that there are no adverse consequences to adopting the ruling.
- Make certain that the results are captured in the Annual Meeting Minutes and have an officer of the Board execute a Resolution for the Revenue Ruling 70-604 election. A copy of the executed resolution should be shared with the CPA preparing the association’s taxes.