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What Is A 501(c)(6)?

What is a 501(c)(6)?

Many people are not aware there are nonprofits organized as a 501(c)(6), at least not enough to recognize them for what they are.  The 501(c)(3) charitable nonprofit is so engrained in their consciousness, they don’t realize there are other categories.  We touched briefly on this in a recent article on 501(c)(4) groups.  Today’s post takes a look at 501(c)(6) trade associations.

501(c)(6) Defined

A 501(c)(6) organization is typically known by one of two monikers:  trade association or business league.  These names may or may not represent exactly the same thing, something we’ll flesh out more below.  The more important point is that a 501(c)(6) represents the business interest of its members, not necessarily the public at-large.

The IRS definition goes like this:

A business league 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.

I always find it amusing how the IRS almost tries to make things sound more complicated than they are!  The first half of the sentence makes more sense to the novice than the latter half.  That is, a 501(c)(6) business league is a member organization that exists for the purpose of supporting a common business interest of the members.  The rather dense second-half of the definition simply means that a business league doesn’t conduct business of its own with the public, at least not in a commercial manner.

The IRS goes on to say:

To be exempt as a business league, an organization’s activities must be devoted to improving business conditions of one or more lines of business (as distinguished from performing particular services for individual persons). It must be shown that the conditions of a particular trade or the interests of the community will be advanced.

In other words, when a prospective 501(c)(6) is seeking such status from the IRS, that organization must actually articulate how its activities will indeed improve the business conditions of the members.

Examples of 501(c)(6) Nonprofits

A 501(c)(6) must be organized as a nonprofit entity.  But just like with other non-charitable nonprofits, the 501(c)(6) must be non-commercial in nature.  That may sound funny, especially given that a 501(c)(6) represents business interests.  It goes back to the notion above that the activity shouldn’t be the direct offering of services to the public.  As with any nonprofit category that may not be well understood, it is helpful to look at real-world examples.

Chamber of Commerce

A Chamber of Commerce, whether local, regional, or national, is a perfect example of a business league.  These are typically organizations where the membership is made up of companies (not individuals) who all do business in a common geographic area.  Chambers of Commerce don’t have their own line of business, but rather work toward the betterment of the business environment for their members.  It’s particularly easy to see this with more local, city-oriented Chambers.  “Shop locally, and support our community’s small businesses!”

Trade Associations

A trade association may have individual members, business members, or possibly a combination of the two.

An example of a trade association geared toward individuals may be a member organization that supports a particular group of professionals, like attorneys, cosmetologists, or certified mechanics.  This is not to be confused with labor unions, which represent individual workers in their interaction with specific employers.  Trade associations for individuals working to better the business prospects overall for their members without regard to who employs them.  Activities and programs can include trade publications, conventions, continuing education opportunities, and even job boards.

501(c)(6) trade associations geared more toward business members are usually made up of companies in the same line of business.  This is a fictitious trade association, but imagine there was one called the National Association of Independent Muffler Shop Owners.  I think you instantly see what that would look like.  I use that fake group to make a broader point about this, though.  The IRS will not allow owners of the same exclusive brand to form a 501(c)(6).  In fact, in the late 1970s, a group of Midas muffler shop franchisees attempted to do just that.  The IRS rejected the bid, and on appeal, the tax court agreed with the IRS.  To form a 501(c)(6) trade association, it must represent the industry, not a particular brand.

Professional Sports Organizations

I bring up this category mainly because it surprises people.  Believe it or not, the National Football League (NFL) was a 501(c)(6) business league until it voluntarily relinquished their tax-exempt status in 2015.  It did so, not because it didn’t qualify to be 501(c)(6), but rather because of negative public opinion.  Personally, I would have preferred to see them stick to their guns and use the opportunity to explain that the NFL was a textbook example of a 501(c)(6) business league rather than back down.  The team owners (members) certainly aren’t nonprofit or tax-exempt.  Unfortunately, the NFL caved.

But, the NFL wasn’t the first to cave.  The NBA gave up its 501(c)(6) status in 2007, while Major League Baseball never had it.  There are professional sports leagues that still operate under 501(c)(6), however, including the National Hockey League (NHL), Professional Golfers Association (PGA), and LPGA.

How To Start a 501(c)(6)

Starting a 501(c)(6) involves incorporation, followed by applying to the IRS for tax-exempt status, just like for charitable nonprofits.  But as we have discussed when talking about other non-charitable categories, the IRS requires 501(c)(6) applicants to use Form 1024 or Form 1024-A.  Beginning in 2021, the IRS eliminated the paper version of this form and only allows filings to be done through Pay.gov.

Foundation Group assists dozens of startup 501(c)(6) organizations every year.  If you need help getting one up and running, we can help.

Tax Treatment of Contributions

Donations to 501(c)(6) nonprofits are NOT tax-deductible to the donor…at least not as a charitable contribution.  However, most members of a 501(c)(6) can deduct dues and other expenses associated with membership as ordinary business expenses.

Conclusion

Most Americans couldn’t tell you what a 501(c)(6) is, but those same people have likely interacted with one.  Whether it’s the activities of your local Chamber of Commerce or the PGA golf match on TV on a Sunday afternoon, 501(c)(6) organizations are valuable nonprofits in our community, impacting lives in a positive way.

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Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

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