Is the 70-604 election for last year or the upcoming year?
By Gayle Cagianut
When our Association makes the “70-604” election to carryover excess membership income to the next year on its tax returns, is it for the past year or the upcoming tax year?
As is the case with much of homeowners association tax law, we do not have an absolute answer from the Internal Revenue Service on this matter. However, based on other tax law we can draw some conclusions.
Tax elections must be made before the tax returns are filed. This generally includes through the date of the tax extension, if any. Thus, it appears that the 70-604 election could be made for the prior year if the tax returns had not been filed yet.
Since 70-604 is a tax planning tool, however, it is reasonable that the election could be made in advance of the year end. Thus, the tax election would be made for the upcoming year end. This allows the CPA to know, in advance, whether or not the membership has approved the election and whether it is an option when preparing the tax returns.
Some additional thought with regards to Revenue Ruling 70-604 elections:
No dollar amount needs to be included when the election is made as that amount is not known until the year end financial statements are completed and the tax adjustments are made by the CPA for capital and non-capital reserve items.
If the Association wishes to file form 1120-H (at the 30% tax rate), no 70-604 is necessary (although it is okay to go ahead and make the election anyway).
Even though many, if not most, CPAs agree that the 70-604 election cannot be used two years in a row, the Association membership should continue making the election annually as it may be of use in an IRS audit situation, or there may be circumstances wherein the 70-604 election would be useful.
There is a misunderstanding that the 70-604 election allows the option of transferring the excess membership income to reserves. This is not included in Revenue Ruling 70-604. The Revenue Ruling allows either carryover to the next year or refund to the membership. If the membership wishes to use the excess to fund reserves, it is a two-step process. First, the election would be to carryover excess membership income to the next year. Second, the excess monies would be allocated to the replacement fund (reserves). When transferring to reserves, remember that the IRS is also looking for such things as notification to members, agreement with the reserve study and budget, and whether capital or non-capital items are being funded.
As with any tax question, consult with your Association’s accountant. There is still a diversity of interpretation of tax law, and there may be extenuating circumstances in your Association, which would allow a different answer from the above discussion.