Written by David T. Schwindt, CPA
What is the 70-604 election?
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. This election, if used when filing Form 1120, may reduce potential risks of filing Form 1120. Associations filing Form 1120H do not qualify to use the provisions of Revenue Ruling 70-604.
How is the election made?
Revenue Ruling 70-604 election is made by voting on the election at a duly organized annual meeting of the membership of the Association. A duly organized annual membership meeting is by definition a meeting that conforms to the annual meeting criteria as set forth by the Association’s governing documents. After the duly organized 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.
After passing the election by vote, the election form should be signed by an officer of the Association signifying the action taken. The form should be forwarded to the Association’s tax preparer.
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 also be made by Associations that 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 such as a lump sum utility easement payment or other unexpected taxable income. In this case, it is advisable to 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.
Does making Revenue Ruling 70-604 require the Association to include excess income in the following years budget?
Not necessarily. Associations should first consult with their CPA on the applicability of Revenue Ruling 70-604 to their own tax situation and determine the best tax planning strategy to help minimize taxable income. Tax strategies may include computing the income tax excess income, deciding which tax Form to file in future years, modifying the allocation between operating and reserve assessments and/or budgeting for a loss in the subsequent year. Tax strategies should be considered as early in the subsequent tax year as possible.
Questions regarding this article may be directed to David T. Schwindt, CPA at Schwindt & Co. (503) 227-1165.