Nonprofit Corporations. Because associations are nonprofit corporations, their budgets should zero-out at the end of each fiscal year. Since income and expenses are projected when annual budgets are adopted, associations are sometimes over budget at the end of the year and sometimes under budget. Any excess income at the end of the fiscal year must either be returned to the membership or applied to the following year's budget as required by Revenue Ruling 70-604 and 75-371, otherwise it will be taxed.
When to Use Resolution. If an association files Tax Form 1120-H, Revenue Ruling 70-604 does not apply and no excess income tax resolution is needed. If Tax Form 1120 is filed, any excess income at the end of the fiscal year (a budget surplus), must be applied to next year's assessments or refunded to the membership. To apply excess funds to next year's budget, members must approve an excess income resolution.
Routine Approval. The decision of what to do with the excess income can be addressed in an "Excess Income Resolution." Because annual meetings precede the close of the fiscal year, associations don't know if they will have excess income or not. Also, they don't know if their tax preparer will file Form 1120 or Form 1120-H. As a result, most associations routinely include a resolution on their agenda for membership approval to make sure they are covered. Since the resolution does not require a vote by secret ballot, the membership can approve it by (i) a voice vote at the annual meeting and record the vote in the minutes of the meeting or (ii) include it on the ballot with the election of directors.
WHEREAS the _________________ Association is a nonprofit mutual benefit corporation; and
WHEREAS the corporation seeks to act in accordance with applicable IRS Revenue Rulings;
RESOLVED, that any surplus funds remaining in the Association's budget at the end of the fiscal year shall be applied to the following year's budget as provided for in IRS Revenue Ruling 70-604.
The above resolution is an example of a formal resolution used by some associations. The resolution can also done without the "WHEREAS" and "RESOLVED" formalities.
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