Written by attorney Kevin F Murphy

Trade Associations--Eligibility for Tax Exemption

Section 501(c)(6) tax exemption does not mean that a trade association is exempt from all taxes. Tax-exempt status exempts a trade association from paying corporate federal income tax on income generated from activities that are substantially related to the purposes for which the entity was organized. For example, revenue derived from programs and activities such as educational conferences and seminars that are an important component in furthering a trade association's tax-exempt purposes is exempt from federal income tax. The organization will, however owe corporate federal income tax on income unrelated to its tax-exempt purposes, called unrelated business income (UBI). UBI is income generated from routine business activities not substantially related to the trade association's tax-exempt purposes. Most tax-exempt trade associations are still subject to a wide variety of other taxes, including federal payroll (Social Security, Medicare, and unemployment) taxes, state and local unemployment taxes, real estate taxes, personal property taxes, sales and use taxes, franchise taxes, and taxes on lobbying activities, among others. Charitable organizations (but generally not trade associations) in many jurisdictions are provided exemptions for certain state and local taxes. A trade association must meet certain basic tests to qualify for exemption under Section 501(c)(6): It must be an association of persons having some common business interest, and its purpose must be to promote this common business interest (this should be reflected in the trade association's governing documents). It must not be organized for profit (i.e., it should be incorporated as a nonprofit corporation, not as a stock corporation). It must be a membership organization and have a meaningful extent of membership support. No part of its net earnings may inure to the benefit of any private shareholder or individual. Its activities must be directed toward improving business conditions of one or more lines of business, as distinguished from performing particular services for individual persons or entities. ("Particular services" has been defined to include any "activity that serves as a convenience or economy to members in the operation of their business, rather than to promote or improve the industry represented by the association, The determination is a quantitative one -- whether or not the particular service is only incidental or minor compared to the principal purpose or benefits of an activity. Denial or revocation of tax-exempt status only occurs when it is concluded that the primary purpose of the organization is the performance of particular services.)

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