Trade associations such as the California Milk Processor Board and the National Pork Board have become familiar to the public through their “Got Milk?” and “Pork: The Other White Meat” advertising campaigns. However, many consumers would be surprised to learn that both these groups enjoy tax-exempt status under Section 501(c)(6) of the Internal Revenue Code (IRC)
Section 501(c)(6) provides tax-exempt status for “business leagues” – more commonly known as trade associations – as well as professional football leagues, chambers of commerce, boards of trade, and real estate boards. The nonprofit, church, and religious organization law attorneys at Church Law Center can help you explore whether your organization is suitable for Section 501(c)(6) or another form of tax-exempt status. We also can advise you concerning the requirements of your organization’s tax-exempt status so that you remain compliant and in good standing with the Internal Revenue Service (IRS).
Defining Business Leagues Under the IRC
According to the IRS, a business league under Section 501(c)(6) is an “association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit.” The organization’s activities must be dedicated to improving the business conditions of one or more lines of business, such as the conditions of a particular trade or interests of the community.
Similar to Section 501(c)(3) charities, business leagues are exempt from federal income taxes and are typically formed under state law as nonprofit corporations. However, these associations differ from charitable organizations regarding member involvement, benefits allowed and permitted political activity.
Business leagues are not allowed to operate as a for-profit. Therefore, these associations cannot engage in activities that ordinarily are carried on for profit. Instead, trade groups are provided with tax-exempt status to focus on industry-wide improvements, which the government recognizes as a public benefit by eliminating their federal income tax burden.
Section 501(c)(6) trade associations are required to have members that provide “meaningful membership support” through the payment of dues and/or involvement in the organization’s activities. The trade association may also have different membership tiers – associate, student, honorary, etc. – but these lesser membership tiers are not considered by the IRS when measuring the extent of membership support.
Any net earnings of the business league or trade association may not be for the private benefit of members. However, members can receive benefits from the organization, such as newsletters or similar publications. Members also can profit from their individual business enterprises as a result of the successful promotion of the common business interest.
Inurement to the benefit of the association’s members is strictly forbidden. For instance, the trade association may not provide any members financial assistance or welfare benefits. Likewise, the association may not distribute non-member income to members through rebates or reduced dues.
Section 501(c)(3) organizations are generally permitted to conduct some lobbying as long as it does not make up a “substantial” part of the organization’s activities. In contrast, Section 501(c)(6) states that organizations “may engage in an unlimited amount of lobbying, provided that the lobbying is related to the organization’s exempt purpose.”
Similarly, Section 501(c)(3) organizations are generally not permitted to engage in political campaigns. On the other hand, Section 501(c)(6) trade associations and other organizations are allowed to engage in political campaign activities, as long as political campaigning is not their organization’s primary activity. However, while membership dues are typically deductible as a business expense, members may not deduct any portion of their membership dues or other contributions used for political activity, including lobbying or political campaigning.
We Can Help Your Nonprofit with All Its Legal Needs
All businesses need legal guidance and advice in their day-to-day operations and when specific legal questions arise. The nonprofit and religious organization lawyers at Church Law Center have the skills and experience to ensure that your organization maintains its tax-exempt status and remains compliant with all other laws and regulations. Together, we can help you advance your organization’s mission by supporting all your legal needs.
Our attorneys and staff are here to represent the interests of your nonprofit or religious organization in any of your legal issues. Call the Church Law Center today at 949.245.3177, email us at firstname.lastname@example.org, or contact us online to learn more about the services we can offer your nonprofit, church, or religious organization.