What is IRS Revenue Ruling 70-604?
Internal Revenue Service (IRS) Revenue Ruling (RR) 70-604 is a tax planning tool permitted to be used when an association files Form 1120 for its federal income tax return. The election itself permits the deferral of excess membership income, which is normally treated as part of taxable income on a Form 1120 filing where RR 70-604 is not used.
Why is the Issaquah Highlands community voting on this now?
This election was recommended by the Issaquah Highlands Community Association (IHCA) auditors at the end of its 2019-2020 fiscal year audit. The auditor recognized the association may receive a tax benefit from utilizing this deferral election. The IHCA received another “clean” audit (unqualified opinion) from its independent auditors, Newman & Company, C.P.A.
What does it mean to vote ‘yes’ or ‘no’?
Approving a RR 70-604 election via a majority vote does not in and of itself necessitate that an association must utilize the deferral election. Rather, it simply allows the association to have the deferral option at its disposal for that specific tax year.
This deferral election is not required to be utilized when it is approved. As such, there is no detriment whatsoever in approving the election each year. Therefore, such a course of action is widely considered a “best practice” in this industry. If the association’s membership does not wish to approve this ruling, then please be aware that the association will be subject to paying federal income tax on its excess operating income — if any — if Form 1120 is filed as the association’s income tax return, which could negatively affect the potential tax benefits of filing Form 1120 as the association’s current year tax return.
Additionally, this ruling must be voted on each year, and a vote can only pertain to one specific tax year.
How does this relate, if at all, to the increase in assessments?
There is no relation to this potential tax benefit and assessments. Assessments are determined using history of expenses, actual costs for services, and projected market increases. Assessments are levied equally across all homes within the Issaquah Highlands.
If you have any questions, please contact the IHCA by phone at 425-427-9257 or by email. Click here to learn more about the 2021 IHCA Board of Directors elections >>