A 501(c)(2) organization refers to a type of tax-exempt entity under the Internal Revenue Code (IRC) as a title-holding corporation or trust that is organized for the exclusive purpose of holding title to property, collecting income from it, and turning over the entire amount (less expenses) to an organization that itself is exempt under sections 501(c)(3) or 501(c)(19) of the IRC. These organizations typically serve to facilitate financing or operations for other exempt organizations.
Example:
Consider a university (a 501(c)(3) organization) that owns a piece of land with several rental properties. To simplify management and financial operations, the university creates a 501(c)(2) organization to hold title to the rental properties. The 501(c)(2) organization collects rent from tenants, pays for property maintenance and other expenses, and then transfers the remaining income to the university. The university benefits from a streamlined property management process, while the 501(c)(2) organization fulfills its purpose by supporting the university’s tax-exempt activities.
This structure helps ensure that the income generated from property is used to further the mission of the tax-exempt organization it supports, while potentially providing some liability protection and operational efficiency.
Unrelated Business Income:
As a general rule, an exempt 501(c)(2) organization may engage only in the business of holding title to property for an exempt parent and turning over the income to the parent. Ordinarily, an exempt title-holding corporation may not have Unrelated Business Income and would be revoked if it engaged in an unrelated trade or business.
The traditional source of income for title-holding companies is rent from real property, including that which is received from renting to the general public. Generally, receiving oil or mineral production payments due to holding a royalty interest is a permissible source of income. On the other hand, holding a working interest is an impermissible source of unrelated business income for a 501(c)(2) title-holding corporation, and could result in revocation of exempt status. Additionally, certain incidentally derived income, such as parking and vending machine revenue, is permitted up to 10 percent of its gross income.
Important Aspect:
Generally speaking, a religious organization designated as a 501(c)(3) is not required to file an annual tax return, Form 990. However, the 501(c)(2) organization must comply with IRS regulations and reporting requirements through the annual filing of Form 990 to report its income, expenses, and activities.
Note:
The exclusive purpose of a 501(c)(2) organization is to hold tile, collect income and turning over it that income less expenses to an organization described as exempt in section IRC Section 501(a).
Please see our other related articles
Choosing the Right Business Entity and Entity Formation
Churches and Unrelated Business Income Tax
Group Exemptions
Disclaimer: Every situation is different and particular facts may vary thereby changing or altering a possible course of action or conclusion. The information contained herein is intended to be general in nature as laws vary between federal, state, counties, and municipalities and therefore may not apply to any given matter. This information is not intended to be legal advice or relied upon as a legal opinion, course of action, accounting, tax, or other professional services. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.
