Making the Election Under Revenue Ruling 70-604
See attached for an example election forms for Revenue Ruling 70-604. We recommend that the election be made at each year's annual meeting, then ratified by the Board of Directors.
The attached model election form can be used as your starting point for creating your own election document. It is important that you have written documentation of your election. Our recommendation is that the members make the election, preferably as part of the annual meeting, then have the board of directors ratify the members' election. The only decision you need to make is whether you are rolling the excess to the next tax year or are refunding the excess to members. Remember that you CANNOT transfer the excess to reserves as an election under Revenue Ruling 70-604; however, you can accomplish this otherwise with proper advance planning.
Election form to apply excess to next year's assessments - click here.
Election form to refund excess to members - click here.
Many people have asked us about how the member vote is conducted. Our recommendation is that this tax election be a standing ballot measure item at each year's membership meeting. Below is some suggested wording for both the ballot listing, and an explanation that the Board may want to attach to fully explain the ballot measure being voted on.
Ballot heading
Vote to approve Tax Election under Revenue Ruling 70-604 - - - -Yes - - - -No
The Board recommends a “Yes” vote
Discussion of Ballot Issue – Revenue Ruling 70-604
A “Yes” vote approves the election under Revenue Ruling 70-604 to “roll over” any excess “member income” (as defined by the IRS) from the current tax year to the next tax year. This is an important tax planning tool for the Association that requires approval by the membership in order to avoid possible dispute with the IRS in the event of a tax audit. Approval of this election by the members provides the Association with protection from negative tax results, and possibly saves the Association money that would otherwise be paid in taxes. At the advice of our CPA, there are no negative consequences to approving this election, but there is the possibility of negative consequences if it is not approved.
Your Board of Directors makes every attempt to budget assessments to cover only necessary Association costs and expenses. However, due to timing of transactions and estimates made during the budget process, occasionally there is a minor “excess member income” at year end. This is a necessary business planning matter, as the Association needs to have sufficient working capital to pay its bills for at least one month ahead. Consequently, it is fairly normal to have excess member income. This excess is automatically “rolled over” as part of the budget process, meaning that the Board considers this amount in calculating next year’s budget.
This tax election under Revenue Ruling 70-604 is the tax equivalent of the normal budget process. But, it does require approval and documentation to comply with IRS rules.