Tax Facts: Section 501(c)(6) Trade Associations

501(c)(6) trade associations are non-charitable tax exempt organizations generally organized to promote and further the interests of a particular industry or type of business with members who are engaged in that trade or business or work closely with it.  A perfect example is the Greater Washington Society of CPAs whose members are CPAs, financial executives and vendors to the financial industry. 

It is important to note that donations and other payments to trade associations are not deductible as charitable donations; but may be deductible to members as business deductions.   They also are not required to file exemption applications to operate as tax exempt organizations.  However, instead of self-declaring, most trade associations do choose to apply for exempt status by filing a Form 1024, which gives them and their members assurance that the IRS is in agreement that they are in fact operating as a trade association under IRC Section 501(c)(6).  As with any tax-exempt organization, they are required to begin filing Form 990 series returns beginning in the year they were formed, typically when incorporated.   Failure to file a 990 series return for three consecutive years will result in automatic revocation of tax-exempt status, even if the organization is a self-declared 501(c)(6) trade association.

Typical activities of trade associations include member meetings and trade shows, educational sessions for members and others, publications and journals, websites, lobbying of regulators and legislative bodies as well as various other programs which benefit members or the industry in general. 

Revenue typically is from dues, publications/subscriptions, meeting admissions, sponsorships and advertising. 

Trade associations may engage in significant levels of lobbying, but under very different rules than charities.  The definitions of lobbying and lobbying expenses are rather complex.  For expenses that fall under these definitions, the default is for the organization to pay a “proxy” tax at the highest current corporate rate on the total of these expenses.  Alternatively, the organization may choose to inform its members of the percentage of their dues which are estimated to be for lobbying and are thus non-deductible to the member.  Each year, the association compares its actual lobbying expense to the estimated total on dues notices and adjusts the next year’s estimated percentage accordingly.   The majority of trade associations opt for this method instead of paying the proxy tax.

Trade associations may make political expenditures but are taxed (on an 1120-POL) at the highest current  corporate rate on those expenditures.

Common sources of Unrelated Business Income (UBI) for trade associations includes advertising revenue from periodicals and website, services provided to individual members (as opposed to services provided to the members as a whole) and rental income from debt-financed property.  Job listing boards/services may be UBI depending upon circumstances.

This article is meant to provide general tax information on tax issues for trade associations and is not intended to be tax advice on particular factual circumstances.  Tax rules for these organizations can be complex, with many exceptions to the general information provided herein.  The reader is advised to consult with a qualified tax professional when questions arise concerning particular factual circumstances.