§456 Prepaid Dues Income of Certain Membership Organizations

Summary

Requires membership organizations to count prepaid dues as taxable income during the years they still owe the promised services or membership benefits. A promise to provide services that lasts no more than 36 months is treated as running evenly over that period. If that promise ends or the organization stops existing, any part of the prepaid dues not yet taxed must be taxed in the year the promise ends or the group ceases. The rule only works if the organization chooses it for the business that gets the dues. You cannot choose it if you use the cash receipts and disbursements method for that business. The choice covers all prepaid dues for that business from the year you make it onward. With the IRS’s permission you can choose at any time; without permission you must choose by the tax return due date (including extensions) for the first year you get prepaid dues. If you choose, you must also include in the first year any amounts from the prior 3 taxable years that would have been taxed earlier if the choice had been in effect then. You may then deduct that extra amount in five equal parts (one-fifth each year) over that year and the next four years, but only up to the part that was included in those prior 3 years. Rules may let you include the full amount in the year of receipt if the promise ends within 12 months. Prepaid dues income means money received for services or membership privileges that go beyond the end of the tax year. A membership organization means a nonprofit without stock whose net earnings do not go to any member. Prepaid dues are counted in the year they would normally be taxed.