Refunds
What happens to assessment money the association collected but never spent
If an association collects more in assessments than it actually spends in a year, the leftover is not automatically taxable income. Under IRS Revenue Ruling 70-604, the association can choose to refund the excess to owners or apply it as a credit toward next year's assessments. Either choice, made properly, keeps it out of the association's taxable income.
Where the leftover comes from
A board rarely spends every dollar it collects. Repairs come in under budget, a vendor contract gets renegotiated, or a mild winter leaves the snow removal line item untouched. When the year closes, the association can be holding assessment money it collected but never spent.
That excess is not a windfall for the association, but the tax free treatment is not automatic either. The association has to actively choose it.
"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, 1970-2 C.B. 9, Internal Revenue Service
Refund or credit forward, the association's choice
Revenue Ruling 70-604 gives the association two options for the excess: refund it directly to owners, or apply it as a credit that reduces next year's assessment. Both routes keep the money out of the association's taxable income. Doing nothing, or getting the paperwork wrong, is what risks a tax bill on money the association never intended to keep.
See Assessment credits for how the credit forward option shows up on an owner's ledger.
Who has to approve it
The ruling describes the money as returned to "stockholder-owners," and named tax practitioners read that phrase as putting the decision in the members' hands, not the board's alone, typically through an annual vote at the membership meeting.
"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: IRS Revenue Ruling 70-604 and MCL 450.2541(2)(b): The Value of Expert Advice, Michigan Community Association Law Blog (Hirzel Law, PLC)
"The members must make this election."
Source: What Is the Election, or Revenue Ruling 70-604?, HOACPA
This is consistent practitioner interpretation of a decades old ruling, not a line written into the IRS code itself. Before the board relies on it, put the question to your association's own CPA or tax preparer, especially since it can interact with how your association files its annual return.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
The association's actual expenses for the year came in $8,000 under what it collected in assessments. Under Revenue Ruling 70-604, what can the association do with that $8,000?
The board alone decides, with no membership vote, to use the 70-604 election this year. According to practitioner interpretation of the ruling, what's the risk?
The declaration is silent on the 70-604 election, and the board wants to know whether Robert's Rules sets the required vote threshold. What's correct?
- IRS Revenue Ruling 70-604, 1970-2 C.B. 9, Internal Revenue Service
- What Is the Election, or Revenue Ruling 70-604?, HOACPA
- IRS Revenue Ruling 70-604 and MCL 450.2541(2)(b): The Value of Expert Advice, Michigan Community Association Law Blog (Hirzel Law, PLC)
Related elsewhere in the Academy
Assessments
Next: see how a credit forward actually shows up on an owner's ledger in Assessment credits.
Whether your association can use the refund or credit election, who must approve it, and how it interacts with your association's tax return depend on your tax filing method and your CPA's advice.