IRS 70-604 Ruling

Started by RichardP13 • 12 replies • 5154 views

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RichardP13 (California)
Posts: 1,767

Posted:

Would an Association with excess operating funds that was rolled into the following year be taxed. For the past seven years, it appears any excess monies were justed rolled over into the following year. At the Annual Meeting, the ballot for the election of director also included a vote on the IRS 70-604 ruling, but because quorum was never reached, no vote was ever carried out. I understand that if the monies were returned to the members or put into reserve, it is not taxable income. What happens if it is never voted on?

SusanW1 (Michigan)
Posts: 5,202

Posted:

How much are you talking about here?

SusanW1 (Michigan)
Posts: 5,202

Posted:

See:
http://realtytimes.com/rtpages/20050810_audits.htm

MaryA1 (Arizona)
Posts: 388

Posted:

Richard,

Excess assessments over and above those needed to operate the HOA which are rolled over to the next years assssments are not taxable income. However, this only applies if the HOA filed the regular corp form 1120. This does not apply if the HOA specific form 1120-H was filed mainly because an HOA is not taxed on assessment income when using this form.

If the HOA uses the form 1120 and chooses to rollover the excess the members MUST vote to either roll it over or return it to the members. If they do not the HOA may be suject to IRS penalties if it is found out a vote did not take place. This would show up during an IRS audit.

RichardP13 (California)
Posts: 1,767

Posted:

On January 1st, 2009, the Association had ovr $315K in its operating fund. Today, we are short fundingn our reserves to pay our everyday bills. The Association files an 1120-H, based on the information provided on this annual reeport this year.

Prior to Decemeber 2009, our water was billed with our HOA dues. The gardners read the meters and each owner was assessed according to usage. There were months that the water usage and reading were exactly the same as a previous month. I believe over 8 years of this helped contribute to a surplus in our operating fund. I would believe the excess revenue should be taxed as income over and above the Associations normal operating expense.

So, if the Associations files its taxes as an Homeowner's Association using form 1120-H, then it really doesn't have to have the members vote on the IRS 70-604 ruling? I know for a fact that the IRS 70-604 ruling was on the ballot for both 2008 and 2009.

MaryA1 (Arizona)
Posts: 388

Posted:

Richard,

Well, I guess the BOD doesn't understand the ruling either! The ruling does not specifically state it only applies to filing the form 1120. But if you understand how the tax is computed on each form you will better understand the ruling.

1) Form 1120 -- tax is computed on net profit. Assessments are considered as income.
2) Form 1120H -- assessments are considered as exempt function income and thereby not taxed -- ever. Tax is computed on non-exempt function income, such as interest earned on savings.

RichardP13 (California)
Posts: 1,767

Posted:

Can the BOD vote in Executive Session to abate one month of assessments. My understanding is that it's the Members who vote on returning, refunding or carryover assessments.

MaryA1 (Arizona)
Posts: 388

Posted:

Richard,

If your question pertains to complying with IRS ruling 70-604 a vote of the members is required however the ruling only applies if the HOA files form 1120.

If you are asking if the board may vote to decide whether assessments should be waived for one month that would be outlined in the CCRs. If the CCRs do not give this authority to the board, or to the members,then it cannot be done. Also this would NOT be a topic that can be discussed or voted on in a closed session and be in accordance with D-S open meeting laws.

RichardP13 (California)
Posts: 1,767

Posted:

Thanks Mary

I was wondering why, if the Association knew it was and has filed in the past, a 1120-H, why would you put the IRS 70-604 issue on a ballot?

MaryA1 (Arizona)
Posts: 388

Posted:

Richard,

Probably because they don't understand the ruling! So, what else is new?

DennisT (Ohio)
Posts: 109

Posted:

As to the Board voting to waive assessments one month Mary is right that you'd have to look to the CC&Rs to see if they have been given that authority. I don't know what state you're in but you should also check the planned community law for your state. There may be something in your state's law that allows the Board to exercise such discretion if the HOA's documents are silent on the matter (i.e. they neither allow nor prohibit it).

DB8 (Washington)
Posts: 15

Posted:

Because depending on the nuances of your tax return that year, it might be in the HOA's best interest to file a Form 1120 that year instead of a 1120-H. Sometimes you don't know till you get the year end financials in and your CPA has gone through it all. So it's considered wise to put that election on the ballot each year which gives the board permission to exercise the 70-604 ruling for the FOLLOWING fiscal year, if the tax return deems it appropriate based on all the criteria. So putting the vote on the ballot doesn't guarantee exercising 70-604 will happen, it just gives permission in case all the stars align and it's appropriate to use it.

CathyA3 (Ohio)
Posts: 6,299

Posted:

This is a really old thread.

If you want to discuss, please start a new thread - it's always possible that some tax laws have changed and some of the posted info is out of date.

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