CCH Axcess Tax

Excess Deductions Under Section 277

This field is automatically pro formaed, or you may enter the prior year accumulation of unused excess exempt function deductions.

The Section 277 limitation only applies to homeowner organizations that file Form 1120.

Section 277 limits the Form 1120 homeowner deductions (for services, insurance, goods and other items of value to members) to fees received from members (or transactions with members), and prevents membership organizations from avoiding tax on nonmembership income (such as interest and dividends) by operating membership activities at a loss and using the loss to offset the nonmembership income.

Example: A homeowner organization with $100K membership fee income, $350K membership expenses, and $300K interest income would have book income of $50K ($100K - $350K + $300K), but taxable income of $300K (Book income of $50K + excess Section 277 deductions of $250). The $300K interest income cannot be sheltered by the excess membership expenses of $250K ($100K - $350K). The $250K is carried over indefinitely, and only used against membership income reported on Form 1120.

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