If your nonprofit is a 501(c)(6) organization, your associations could threaten your tax-exempt status if they aren’t prioritizing common interests of the organization. California nonprofits audit and tax service providers urge you to ensure compliance with IRS rules by routinely reviewing your member offerings, associations with other organizations, and any business you currently or might conduct.
Your associations should support common interests
If your nonprofit is involved with a trade association, the association should promote their members’ common interests while improving business conditions. These associations run into trouble if their definitions of “common interests” and “improving business conditions” are too broad.
If an association exists only to provide services for individual members, it won’t qualify for tax-exempt status. Additionally, nonprofits shouldn’t engage in business that’s carried out on a for-profit basis. Associations that are mostly social in nature or promote a hobby also don’t qualify for tax-exempt status.
Your associations shouldn’t favor individual members
Your nonprofit must differentiate between qualified and nonqualified activities. You are typically allowed to:
- Influence legislation relating to common business interests,
- Test and certify products
- Establish industry standards,
- Publish statistics on industry conditions to promote your members’ line of business, and
- Research effective business practices to share with members.
Limit activities if they benefit specific members rather than your industry as a whole. These include selling advertising in member publications; facilitating the supply purchases; and providing workers’ compensation insurance. In other words, stay focused on your association’s “primary purpose.” Most 501(c)(6) groups perform activities that don’t primarily serve common interests, and these activities should be limited in scope and number. Keep an eye on your association ties and report on them with the care you’d give accounting rules for gifts in kind.
Tread carefully with unrelated business
Even activities that don’t threaten your exempt status can trigger unrelated business income tax (UBIT). Typically, members directly pay for these services instead of through dues or other common methods. Depending on your provided services and the revenues raised, you may owe UBIT. Stop and reassess if you’re providing more services for individual members. Instead, consider forming a separate for-profit organization for those services.
Ernst Wintter & Associates provides California nonprofit audits, broker dealer audits, tax services, and 401(K) audit services. Contact us for more information.
