Are 501(c)(6) Organizations Tax Exempt?
Demystify 501(c)(6) tax exemption. Learn about the specific IRS status for business leagues and chambers, including how to qualify and maintain it.
Section 501(c)(6) organizations are nonprofit entities recognized by the Internal Revenue Service (IRS). They primarily serve as business leagues, chambers of commerce, real estate boards, boards of trade, or professional football leagues. Their main purpose is promoting the common business interests of their members, not engaging in a regular business for profit. While generally tax-exempt, this status applies specifically to federal income tax on income related to their exempt purpose and does not extend to all forms of taxation.
Understanding 501(c)(6) Tax Exemption
Organizations recognized under Section 501(c)(6) are exempt from federal income tax on income from activities furthering their exempt purpose, such as membership dues and fees. The exemption focuses on improving business conditions for an entire line of business or community.
This federal income tax exemption does not automatically extend to other types of taxes. 501(c)(6) organizations are generally not exempt from state income, sales, property, or employment taxes, unless specific state or local exemptions apply.
Income from activities not substantially related to the organization’s exempt purpose is subject to Unrelated Business Taxable Income (UBTI) tax. This applies if the activity is a regularly carried on trade or business not substantially related to the organization’s tax-exempt functions. If an organization has $1,000 or more in gross unrelated business income, it must file Form 990-T and pay taxes at corporate rates on its net unrelated business income.
Requirements for 501(c)(6) Eligibility
To qualify for 501(c)(6) status, an organization must primarily operate as a business league, chamber of commerce, real estate board, board of trade, or professional football league. The IRS defines a “business league” as an association of persons with a common business interest. Its purpose must be to promote this common interest, not to engage in a regular business for profit.
The organization’s activities must improve business conditions for one or more lines of business, not perform specific services for individual members. For example, providing customized sales training for only some members or facilitating supply purchases for individuals could jeopardize this requirement. The benefit must be broad-based for the industry or profession as a whole.
No part of the organization’s net earnings may benefit any private shareholder or individual. This rule, known as the private inurement doctrine, ensures income and assets are used for its exempt purpose, not distributed to insiders. Reasonable compensation for services rendered is permissible.
These organizations have more latitude regarding lobbying and political activities. They can engage in lobbying efforts to influence legislation related to their members’ common business interests. However, direct intervention in political campaigns for or against any candidate is generally prohibited. Organizations must notify members about the portion of their dues used for non-deductible lobbying expenditures.
Applying for 501(c)(6) Status
After establishing the organization as a legal entity under state law, the next step is to apply for federal tax-exempt status with the IRS. The primary document for this application is Form 1024. This form requires detailed information about the organization’s structure, purpose, and activities.
Applicants must submit various supporting documents with Form 1024, including:
The organization’s articles of incorporation or association
Bylaws
A comprehensive narrative describing past, present, and planned activities
Detailed financial statements (actual and projected)
Information concerning compensation paid to officers, directors, and key employees
The completed Form 1024 and all required attachments are typically submitted electronically through Pay.gov. An application fee, which can be around $600, must accompany the submission. The IRS reviews the application and may request additional information. Upon approval, the IRS issues a determination letter recognizing the organization’s 501(c)(6) tax-exempt status.
Ongoing Compliance for 501(c)(6) Organizations
Maintaining 501(c)(6) tax-exempt status requires continuous adherence to IRS regulations and ongoing compliance. A significant requirement is the annual filing of an information return with the IRS. Most 501(c)(6) organizations file Form 990, 990-EZ, or 990-N, depending on their gross receipts and total assets.
Beyond annual reporting, organizations must consistently operate within the parameters that qualified them for tax exemption. This includes promoting the common business interests of their members for an entire line of business, avoiding private inurement, and ensuring lobbying or political activities remain within established limitations. Failure to adhere to these requirements can jeopardize the organization’s tax-exempt status.
Non-compliance can lead to penalties or, in severe cases, revocation of tax-exempt status. Organizations must also be mindful of state-level requirements, which can include separate registration or state-specific tax filings. While federal recognition is primary, state and local tax obligations can vary significantly.