§456 Prepaid dues income of certain membership organizations

Summary

Requires membership groups that get prepaid dues to count that money as taxable income for the years when they still owe the services or membership benefits. If the obligation ends or the group stops existing, any prepaid dues not yet counted must be included in income in the year the obligation ends or the group ceases. The group must choose to use these rules for a particular trade or business. It cannot choose them for a trade or business that uses the cash method of accounting. The choice applies to all prepaid dues for that trade or business, unless the group instead includes the whole amount in the year it is received when the obligation ends within 12 months. The choice can be made with the tax official’s permission at any time, or without permission for the first year the group gets prepaid dues if filed by the tax return due date (including extensions). Once made, the choice stays in effect unless the tax official allows it to be revoked. When making the choice, the group must also add an amount equal to what would have been taxable in the three prior years if the choice had been in effect then; that added amount may then be deducted in five equal parts (one-fifth each year) over the current year and the next four years, but only to the extent that the added amount was included in income during any of those three prior years. Definitions in simple terms: prepaid dues income = money received tied to services or membership benefits that go past the end of the tax year; liability = the obligation to provide those services or benefits for up to 36 months, spread evenly over that time; membership organization = an organization with no stock and that does not pay profits to members. Prepaid dues are treated as received in the year they are taxable under the normal tax timing rules.