Assessment credits

Why leftover assessment money is a tax question

Most associations budget conservatively, so a year sometimes ends with assessment income left over after every bill is paid. That leftover amount is not automatically tax free just because it came from owner dues. The IRS treats it as ordinary income to the association unless the association takes a specific step to avoid that result.

"The excess assessments for the taxable year over and above the actual expenses paid or incurred for the purposes described above are not taxable income to the corporation, since such excess, in effect, has been returned to the stockholder-owners."

Source: IRS Revenue Ruling 70-604, Internal Revenue Service

That is the whole mechanism: the association either refunds the excess to owners, or it elects to roll the excess forward as a credit against next year's assessments. Either choice, made properly, keeps the money out of taxable income.

Who actually has to make the choice

Boards often assume this is a bookkeeping decision the treasurer or CPA can make alone. Practitioners who have followed IRS audits on this point read the ruling differently: because it refers to "stockholder-owners," they say the choice belongs to the membership, not the board by itself.

"The Ruling's reference to 'stockholder-owners' suggests that the Ruling requires that an election under Ruling 70-604 be made by the corporation's members, not the board of directors."

Source: Matthew Heron, Hirzel Law, PLC, Michigan Community Association Law Blog

This membership-vote reading comes from named practitioners, not from the IRS itself in a public regulation, so confirm current practice with your association's own CPA or tax preparer. At least one audit cited by a second practitioner source disallowed an election made by the association's CPA alone, which is the risk of skipping the vote.

How this usually plays out at the annual meeting

In practice, many associations put the refund-or-credit choice on the agenda at the annual membership meeting, right alongside the budget. The vote and its result get recorded in the minutes, and the treasurer or CPA carries the credited amount into next year's assessment calculation. Skipping this step does not make the surplus disappear, it just leaves the surplus exposed to being taxed as association income.

How this election interacts with a Form 1120-H filing, and whether your state adds its own requirements, was not researched for this Course. Bring both questions to whoever prepares your association's tax return before year end.