§456 Prepaid Dues Income of Certain Membership Organizations

Summary

Membership groups must count prepaid dues as income in the years when they still owe the services or membership benefits. If the group’s obligation ends, any dues that were not counted before must be included in income in the year the obligation ends. If the group stops existing, any unpaid-to-date dues must be counted in the year it stops. A group can choose to use these rules for a business it runs, but not if it uses the cash receipts and disbursements way of accounting. The choice applies to all prepaid dues for that business, unless the group decides to count all dues right away when the obligation will end within 12 months. The choice can be made any time with the IRS’s OK, or without the IRS’s OK if made by the tax return due date for the first year the group gets prepaid dues. Once made, the choice stays in effect for future years unless the IRS agrees to end it. If the group makes the choice, it must also add an extra amount equal to what would have been reported from prepaid dues in the three years before the choice. That extra amount may be deducted later in five equal yearly parts (one-fifth each year) over the next five years, but only to the extent those amounts were included in income in any of the three years before the choice. Definitions: prepaid dues income = money received for services or membership benefits that stretch past the tax year; liability = the obligation to provide those services or benefits for up to 36 months, spread evenly over that time; membership organization = a nonprofit group with no capital stock and no profit paid to members; receipt timing = prepaid dues are treated as received in the year they must be included under general income rules.