Deductibility of Dues and RPAC Contributions, Required Notices, and Taxation of Associations making Political Contributions and Expenditures.
This memo describes the federal income tax implications of political and legislative activity by state and local associations of REALTORS®, including invoicing members for dues and other payments used by the association for lobbying and other political activity, soliciting and collecting contributions to RPAC, and using association funds to make expenditures in support of or opposition to candidates for public elective office.
1. Nondeductibility Notice I: Associations must include a notice on membership dues statements identifying the portion of dues used for lobbying and political expenditures and that such amount is nondeductible by the member.
- Section 162 of the Internal Revenue Code provides a deduction for ordinary and necessary business expenses, but Section 162(e) excludes from that deductible amount any expenses for federal or state lobbying and political activity.
- As a consequence, expenditures of corporate treasury funds for lobbying and political purposes are not deductible by the corporation making such expenditures. For tax-exempt associations, this nondeductibility is of little consequence since they do not ordinarily pay federal income tax, but Section 162(e)(3) provides that such nondeductibility is “passed through” to association members for such expenditures made from association dues. Therefore, the portion of member dues used by the association for such political or lobbying activity is nondeductible by the member.
- With respect to the portion of dues that are nondeductible due to use for lobbying or political expenditures, Section 6033 of the I.R.C. requires a tax exempt association to provide to members, at the time of dues assessment or payment of similar amounts, notice of its reasonable estimate of the dues or similar amounts it expects to spend for lobbying or political activities during the calendar year for which those dues are paid. Accordingly, an association must compute an estimate of the amount it anticipates spending on such activities for the forthcoming year and indicate on the annual dues statement sent to members the portion of each member’s dues anticipated to be used for such purposes in that year.
- If an association fails to provide such notice, or provides an estimate that understates the amount actually spent for such activities in the year to which the notice applies, the association may either (1) pay a tax on the amount for which no notice was provided, taxable at the highest corporate rate of tax (currently 35%), or (2) add the “excess” of such expenditures (that is, the amount spent in excess of the estimate) when computing the nondeductible amount for the subsequent tax year.
Expenditures for the following activities are nondeductible under Section 162(e):
- Political activities associated with advocacy of candidates, both directly (such as contributions or independent expenditures) and indirectly (such as PAC administrative or fundraising expenditures).
- Contributions to NAR’s Political Advocacy Fund or similar state or local funds or programs operated to engage in political (candidate) or issue advocacy activities.
- Lobbying expenses for federal or state lobbying (or amounts paid to NAR or a state association to be used for lobbying), but NOT expenditures for “local lobbying.”
- Issues advocacy activities for ballot initiative, referenda, and the like.
Conversely, expenditures for the following activities would not be subject to this nondeductibility exclusion:
- Conducting meetings or other functions at which legislative or elected executive officials are present to discuss legislative matters without lobbying on particular legislative proposals.
- Nonpartisan voter registration or generic (not targeted) get out the vote expenditures.
- Lobbying related to local legislation, and “in house” lobbying expenditures that do not exceed $2,000.
2. Nondeductibility Notice II: Associations must include on all RPAC contribution solicitations, including member dues statements that request an RPAC contribution, a notice that RPAC contributions are not deductible for federal tax purposes.
- Political contributions by association members solicited and collected by associations from their members – most notably, contributions to the REALTORS® Political Action Committee – are not deductible for federal income tax purposes by the members making such contributions.
- Section 6113 of the Internal Revenue Code (I.R.C.) requires that political organizations include on any fundraising solicitation an express statement “…in a conspicuous and easily recognizable format….” that contributions are not deductible for federal tax purposes as charitable contributions.
- Similarly, organizations soliciting political contributions from their members are required to including on any dues statement that includes a request for a political contribution, or on any other solicitation for a political contribution, such a notice that the contribution is not deductible for federal income tax purposes.
- REALTOR® associations soliciting RPAC contributions from their members – either on the annual dues statement or other solicitations - must include a statement that “Contributions to RPAC are not deductible for federal tax purposes” or “Contributions to RPAC are not deductible as charitable contributions for Federal income tax purposes.” The “standard” RPAC dues solicitation notice/disclaimer provided by NAR includes this statement.
- To be “sufficiently conspicuous” to satisfy the requirement of Section 6113 the notice must be in at least the same size typeface as the primary message and must be the first sentence in the solicitation notice paragraph or a paragraph by itself.
3. Taxation of Association Expenditures for Political (Candidate) Advocacy.
- Organizations that are exempt from Federal income tax under Section 501, including REALTOR® associations that are exempt under Section 501(c)(6), may be subject to federal income tax under Section 527(f) on contributions or expenditures made from treasury funds for purpose of influencing the election or defeat of local, state or federal candidates.
- The tax applied by Section 527(f) is imposed on the total amount of the organization’s contributions or expenditures for such election-influencing purposes or the organization’s net investment income, whichever is smaller, and is subject to a deductible amount of $100.
- Examples of expenditures that are subject to the 527(f) tax if made by an exempt association from association treasury funds are contributions to PACs, contributions to candidates, independent expenditures in support of or opposition to candidates, or other expenditures made for the purpose of supporting or opposing candidates.
- If an association operates a separate PAC, using a segregated bank account to do so, and the PAC engages exclusively in candidate election-related activities, the tax imposed by Section 527(f) will not apply to the association. The tax also will not apply to the PAC if it is operated as a separate political organization under Section 527.
- Significantly, the 527(f) tax does not apply to an exempt organization’s expenditures that are expressly permitted by state or federal campaign finance law, or contributions to entities that use contributed funds for such expressly permitted purposes. In particular, contributions to the NAR Political Advocacy Fund (PAF) are primarily for political communications to members of NAR (the NAR “Opportunity Race” program), which are explicitly permitted under the Federal Election Campaign Act, and for certain other activities to which 527(f) would not apply. Accordingly, association contributions to the NAR PAF are not subject to the 527(f) tax. The 527(f) tax does also not apply to permissible PAC-related expenditures, such as expenditures for PAC administrative or solicitation activities.