Generally, a state or local REALTOR® association operates as a tax-exempt organization under Section 501(c)(6) of the Internal Revenue Code. A 501(c)(6) tax-exempt organization (also known as a trade association) is the association of persons who have a common business interest and the association’s activities are devoted to improving business conditions of one or more lines of business.
However, a REALTOR® association may desire to engage in certain activities that are beyond the association’s tax-exempt purpose, such as charitable activities or to promote social welfare. While an insubstantial amount of such activities may be permissible, the association may want to consider another way to carry such activities if they become substantial. A useful tool to carry such activities is a related tax-exempt organization. A related tax-exempt organization is a separate tax-exempt organization classified under Section 501(c) of the Internal Revenue Code organized and operated for specific tax-exempt purposes while maintaining a close connection with the association.
A great example is the National Association of REALTORS® (NAR) and its related tax-exempt organizations, the REALTORS® Relief Foundation (RRF) and the American Property Owners Alliance (APOA). RRF was formed in the immediate aftermath of September 11, 2001, specifically to provide needy victims of disasters and their families assistance with housing-related needs arising out of disasters, and for other charitable purposes permitted under Section 501(c)(3) of the Internal Revenue Code. Similarly, several state and local REALTOR® associations have followed suit to form charitable organizations. APOA was formed as a Section 501(c)(4) organization purposed to advance and promote pro-property rights issues and policies to property owners and consumers throughout America.
While both organizations fulfill tax-exempt purposes, their respective activities are beyond NAR’s common business interest. By NAR forming related tax-exempt organizations, NAR remains focused on its tax-exempt purpose and related activities, NAR minimizes potential liability risks associated with such activities, and NAR maintains some sort of control or connection to the related organization.
How to Form a Related Tax-exempt Organization
If your REALTOR® association is considering a related tax-exempt organization, you may be wondering how to properly form one. Tax-exempt organizations are incorporated under state law, in the state where the organization will conduct most of its activities, by filing an incorporation document with the state. The incorporation document should meet both state and federal requirements because the organization’s subsequent tax-exempt application requires the incorporation document to include specific IRS language. Once the state approves the incorporation document, the organization is legally incorporated and the organization must hold an organizational meeting to conduct organizational actions (i.e., elect officers, adopt bylaws), apply for an employer identification number, and subsequently apply for federal tax exemption status with the Internal Revenue Service (IRS). The organizational documents, such as the corporate bylaws, will outline the relationship between the association and the related tax-exempt organization (e.g. the association will appoint the board of directors of the related tax-exempt organization).
What Are the Legal Requirements?
Once the related tax-exempt organization is formed and receives tax-exempt recognition from the IRS (or is self-declared, if applicable), the tax-exempt organization must become familiar with state and federal legal requirements.
1. State and Federal Annual Reports
Generally, states require tax-exempt organizations to file an annual report. The annual report may likely require the organization to confirm or update its principal office address, board of directors and officers, registered agent, and related information. Failure to timely file the state annual report may result in forfeiture of the organization’s corporate status in the state. At the federal level, the IRS will require the organization to file a Form 990 informational tax return annually and failure to do so will likely jeopardize the organization’s tax-exempt status.
State annual reporting requirements vary state by state. For more information, contact your state of incorporation to learn more about the annual requirements and the Internal Revenue Service for more information on Form 990.
2. Notice to Members on Lobbying Expenses
501(c)(4) and 501(c)(6) tax-exempt organizations must provide notice to their members, at the time of assessment or payment, with a “reasonable” estimate of the portion of member dues used for lobbying activities. The notice should advise members that they cannot deduct the “reasonable” estimate portion of dues used for lobbying activities from their tax liability (i.e. as a business expense).
For more information, read NAR’s article on REALTOR® Association Proxy Tax Requirement.
3. Unrelated Business Income Tax (UBIT)
Tax-exempt organizations may be subject to UBIT when the organization gains unrelated business income:
- From a trade or business
- An activity conducted with the intent to make a profit from selling goods or performing services.
- Regularly carried on, and
- With frequency and continuity and pursued like a comparable commercial activity.
- That is not substantially related to the tax-exempt purpose(s)
- Doesn’t contribute importantly to accomplishing that purpose.
For more information, visit the Internal Revenue Service for more detailed information on Unrelated Business Income Tax.
4. Charitable Solicitation
Charitable solicitation is generally regulated by state law. At least 41 states have enacted laws regulating the solicitation of funds by charitable organizations and paid professional fundraisers/counsel for charitable purposes.
Generally, organizations are required to submit an initial registration prior to soliciting funds within the state and annual renewal filings in a timely manner. The initial registration and annual renewal filing will likely require the charitable organization to include general information related to the organization, information about the organization’s fundraising activities, and certain financial information. Additionally, some states require specific disclosure statements to be included on all written solicitation materials (including, specific font size, font type, etc.)
Charitable solicitation requirements vary state by state. For more information, contact your state of incorporation to learn more about the state requirements and visit the Internal Revenue Service page on Charitable Solicitation.
As your REALTOR® association considers its activities and whether to form a related tax-exempt organization, review the chart below that outlines three common tax-exempt classifications, including the purpose, tax treatment, and limitations of each classification.
|PURPOSE||Charitable, religious, educational, scientific, etc.||Operated primarily for the promotion of social welfare.||Promote common business interest|
|EXAMPLES||Private Foundation, Public Charity
REALTOR® Relief Foundation,
|Civic Leagues, Social Welfare Organizations
American Property Owners Alliance
|Business Leagues, Chambers of Commerce, Real Estate Boards
National Association of REALTORS®
|TAX TREATMENT||-Donations ARE tax-deductible
-Subject to UBIT
|-Donations are NOT tax-deductible
-Subject to UBIT
|-Donations are NOT tax-deductible
-Membership dues may be deductible as business expense
-Subject to UBIT
|LOBBYING||Limited; insubstanial activity permitted||Unlimited; provided lobbying is related to exempt purpose||Unlimited; provided lobbying is related to exempt purpose|
|POLITICAL ACTIVITY||Prohibited unless nonpartisan activities||Permitted to carry on partisan political activities (subject to federal and state campaign finance laws) but may not be the "primary purpose" of the organization.||Political activities (subject to federal and state campaign finance laws) but may not be the "primary purpose" of the organization.|