IRS Revenue Ruling 1120 vs 1120H

With a filing of 1120 the tax rate is 15% and 30% for 1120H.
Filing as a regular corporation (1120) could expose membership dues to taxation if the exclusion does not adhere to the IRS ruling. The following are the rulings used to exclude membership dues when filing Form 1120.

Treated as an exclusion from gross income as a contribution to capital per Revenue Ruling 74-563, 75-370, and 75-371.

Either offset by prior year Exempt Function Net Loss Carryforward per Internal Revenue Code Section 277 or by deferring the recognition of the income to the following year per the Revenue Ruling 70-604.

In order to exclude from taxable income the portion of the dues collected for contribution to the reserves, an Association should comply with the following:

1. Notify the owners in advance that a specific portion of their assessments represents a contribution to the capital of the Association. (This can be made by distributing a budget to the owners that separately classifies the assessments for future major repairs and replacements.)
2. Designate funds for future major repairs and replacements for specific capital expenditures.
3. Segregate the funds for future major repairs and replacements from the operating funds. Separate bank accounts would be required for operating and reserves funds.

When preparing tax returns if the tax exposure exceeds the savings given by the 15% rate, Form 1120-H is filed to avoid exposing the membership dues to taxation.


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