Similar to all charitable organizations, business leagues are subject to various restrictions to safeguard their federal tax-exempt status under Internal Revenue Code (IRC) §501(c)(6). These rules can be complicated, particularly when it comes to political activity and membership dues. If you have questions about your business league and maintaining its tax-exempt status under the Internal Revenue Code, contact the California Center for Nonprofit Law at (949) 892-1221 today for legal advice and guidance.
Defining Business Leagues
According to Treas. Reg. 1.501(c)(6)-1, business leagues are associations of individuals that have some common business interest. A business league aims to promote this common interest rather than engage in a regular business of the kind that one would ordinarily carry on for profit. Promoting a business league’s common business interest should focus on improving the business conditions of one or more lines of business rather than promoting any private interest of its members. A business league is an organization of the same type as a chamber of commerce or a trade association.
IRC §501(c)(6) provides federal tax-exempt status for business leagues, chambers of commerce, real estate boards, and trade associations. To qualify for tax-exempt status under this code section, these associations must be organized as nonprofit organizations, and no part of their net earnings must inure to the benefit of any private shareholder or individual. To remain tax-exempt under this section, business leagues are subject to certain restrictions, including on their political activities. As such, the IRC restricts the deductibility of business members’ membership dues based on the business league’s political and legislative activities.
Membership Dues Used for Political and Legislative Purposes
IRC §162(e)(1) states that business taxpayers may not deduct any part of membership dues paid to a business league to the extent that those dues are used to participate or intervene in a political campaign on behalf of any candidate for public office. Likewise, membership dues are non-deductible when paid to a business league if they are used to attempt to influence the public, or any segment thereof, concerning legislation, elections, or referendums. Therefore, if a substantial amount of the business league’s activities consists of one or more of these activities, then a deduction for the member’s dues is permissible only for that portion of the dues attributable to other activities.
Membership Dues and Grassroots Lobbying
As part of this prohibition, membership dues are not deductible to the extent that they are used in “grassroots” lobbying. However, “institutional” or “goodwill” advertising expenses are permissible. This distinction may often be difficult to discern.
Institutional or goodwill advertising involves ordinary and allowable expenses designed to bring the organization’s name before the public. These advertisements may include views on economic, social, financial, or other general subjects so long as they don’t directly or indirectly propose, support, or oppose legislation and otherwise meet the regulations under §162. The challenge is often determining whether the advertisement is entirely institutional or goodwill in nature, as opposed to an attempt to develop a grassroots point of view concerning legislation or a referendum through words or images.
Examples of grassroots lobbying that would make membership dues non-deductible include the following:
- Distribution of a letter to shareholders containing testimony by the organization’s president against an environmental bill, emphasizing its cost to the corporation and recommending its defeat;
- Newspaper and magazine advertisements urging rejection of a land use bill that would impede the organization’s land development business;
- Communication to association members requesting that they ask their employees and customers to support the repeal of a certain piece of legislation; and
- Communication with prospective association members asking them to contact their congressman in support of certain legislation that would be favorable to the association.
Call the California Center for Nonprofit Law Today
If your business league needs legal advice or assistance, we are here to help. Contact an experienced nonprofit lawyer today. Call the California Center for Nonprofit Law offices at (949) 892-1221, email us at info@npolawyers.com, or contact us online for more information today. We offer a wealth of experience handling the unique legal issues that nonprofit organizations routinely face.
