IRS 70-604 Pros and Cons: Key Considerations for Your HOA

Homeowners associations (HOAs) often face challenges navigating tax regulations, but IRS Revenue Ruling 70-604 offers a valuable opportunity to defer taxation on excess income. This provision allows HOAs to either refund the surplus to members or apply it toward the next year’s expenses.

Eligibility Guidelines

To take advantage of IRS Revenue Ruling 70-604, an HOA must meet the requirements outlined in Section 528 of the Internal Revenue Code. The association must exist to manage and maintain association property, with at least 60% of its gross income derived from membership dues, fees, or assessments. Additionally, 90% of its expenditures must be for property-related activities. The election must be made annually by a member vote, typically during the association’s annual meeting, and finalized before the tax year ends.

Required Documentation

HOAs must maintain comprehensive records to comply with IRS Revenue Ruling 70-604. This includes meeting minutes that document the election, along with financial statements demonstrating adherence to Section 528 requirements. Records should clearly show that at least 60% of income comes from member dues and that 90% of expenditures are property-related. Retaining these documents, including correspondence and financial reports, for a minimum of seven years ensures readiness for any IRS inquiries.

Filing Procedures

Filing under IRS Revenue Ruling 70-604 requires careful preparation. The election must be reflected in the association’s tax return on Form 1120-H, designated for homeowners associations. Financial statements must be reviewed to confirm compliance with Section 528. The election must be made within the tax year, making timely planning essential. Establishing a clear timeline for gathering financial data, holding member meetings, and completing the form helps avoid penalties.

Reserve Allocations

Proper reserve allocation is critical for an HOA’s financial stability. Revenue Ruling 70-604 allows excess income to be directed into reserve funds for future expenses such as roof replacements or infrastructure repairs. A detailed reserve study, which assesses the association’s assets and projects costs for replacements, ensures financial preparedness for both anticipated and unforeseen expenses.

Compliance with Tax Regulations

Adhering to tax regulations is essential when utilizing IRS Revenue Ruling 70-604. HOAs should consult tax professionals familiar with HOA-specific requirements to ensure compliance with Form 1120-H and Section 528. Failure to meet these requirements can result in penalties or loss of tax-exempt status, with significant financial consequences. Regular audits and financial reviews are crucial for maintaining compliance and overall financial health.