If your nonprofit is a 501(c)(6) organization, your associations could threaten your tax-exempt status if they arenโt 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 membersโ common interests while improving business conditions. These associations run into trouble if their definitions of โcommon interestsโ and โimproving business conditionsโ are too broad or loosely interpreted. The IRS carefully reviews whether these interests are directly connected to the trade or industry the association represents, rather than vague or generalized goals that could apply to any organization. Associations must be specific in outlining their exempt purpose and show that their activities serve the collective benefit of the industry rather than individual members.
To maintain tax-exempt status under Section 501(c)(6), the association must operate primarily to promote such shared interestsโnot to benefit individual members. If an association exists only to provide direct services for individual members, such as marketing support, client referrals, or administrative tools, it wonโt qualify for tax-exempt status. These services are considered private benefits rather than public or member-wide benefits.
California Nonprofits
Additionally, nonprofits should not engage in activities that resemble a business operated for profit. Generating revenue is not inherently problematic, but when the activity becomes commercial in nature and is not substantially related to the exempt purpose, the IRS may consider it unrelated business income (UBI), which can be subject to taxes and even jeopardize the organization’s tax-exempt status if it becomes a primary activity.
Associations that are mostly social in nature or promote a hobby, rather than a legitimate industry or professional trade, also donโt meet the requirements. Clear documentation, defined mission statements, and proper operational practices are essential to remain compliant and preserve tax-exempt eligibility. In addition, regular legal and financial reviews can help ensure your organization aligns with IRS expectations and avoids costly compliance pitfalls. Maintaining transparency with members and stakeholders is also crucial for reinforcing long-term trust and sustainability.
Your associations shouldnโt 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 membersโ 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 workersโ compensation insurance. In other words, stay focused on your associationโs โprimary purpose.โ Most 501(c)(6) groups perform activities that donโt 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 youโd give accounting rules for gifts in kind.
Tread carefully with unrelated business
Even activities that donโt 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 youโre 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.
