Trade associations like the California Milk Processor Board and National Pork Board became familiar to the public through their “Got Milk?” and “Pork: The Other White Meat” advertising campaigns. A lot of consumers would be surprised to learn that both of these groups enjoy tax-exempt status thanks to Section 501(c)(6) of the Internal Revenue Code that provides this exemption 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.
Similar to Section 501(c)(3) charities, trade associations are exempt from federal income taxes and are typically formed under state law as nonprofit corporations. However, trade associations differ from charitable organizations when it comes to member involvement, benefits allowed, and permitted political activity.
Under Section 501(c)(6), trade associations are required to advance a “line of business” through the common business interests of its members. They are not allowed to operate for a profit or for the private benefit of members. Trade groups are provided with tax-exempt status to allow them 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 tiers of membership — associate, student, honorary, etc. — but these lesser tiers of membership are not considered by the IRS when measuring the extent of membership support.
While 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, Section 501(c)(6) organizations “may engage in an unlimited amount of lobbying, provided that the lobbying is related to the organization’s exempt purpose.”
While Section 501(c)(3) entities are not permitted to engage in political campaigns, Section 501(c)(6) trade associations and other organizations are allowed to engage in political campaign activities as long as political campaigning is not its 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.
The Church Law Center of California advises churches and other nonprofits on how to protect themselves from risk while furthering their mission. Call us today at (949) 689-0437 or reach out to us through our contact page.