If your association files Form 1120 for its federal tax return, as opposed to Form 1120-H, do not forget to make your annual Revenue Ruling 70-604 election. It is most effective to make this election at the annual meeting. Revenue Ruling 70-604 allows homeowners associations to avoid taxes on excess membership income when income exceeds membership expenses. The membership will usually vote to apply any excess against next year’s assessments (the only other option is to refund the excess to the membership, which can be an administrative burden). Only one of these two options may be elected. The membership may not elect to fund reserves with the excess.
The election should be made every year. It is not necessary to know the amount of the excess at the time of the election. If there is no excess membership income, then the effect of the election is that no excess is applied. Document the election, and include the election in the minutes of the membership meeting. Be sure to notify your CPA of the election. The CPA will need to reflect the election in the association’s tax return if Form 1120 is filed. If Form 1120-H is filed instead, Revenue Ruling 70-604 does not apply. The best practice is to work with a CPA who has community association experience. The CPA will be knowledgeable of the specific tax regulations that apply to owners associations.