The Internal Revenue Service has many designations for non-profit entities. Though 501(c)(3) organizations are more familiar to many, the IRS also allows tax-exempt status for certain business leagues under section 501(c)(6) of the tax code. These organizations differ considerably in purpose and operation from their 501(c)(3) counterparts.
Organizational Purpose and Function
A 501(c)(3), according to IRS standards, is a charitable organization that serves to improve the public good. Examples of 501(c)(3) organizations include groups that help impoverished people, organizations that guide troubled teens and organizations that work to eliminate blight in the community. By contrast, a 501(c)(6) is a membership-based organization or club that exists to serve its members and further their interests. Examples of 501(c)(6) organizations include professional membership clubs, trade associations and sports leagues.
Because 501(c)(3) organizations depend on donations and contributions received from the public, the IRS allows donors to deduct funds given to a 501(c)(3) from their taxable income. Some 501(c)(3) organizations hold fundraisers, auctions and other events. Donors later deduct the contribution needed to attend such gatherings from their tax liabilities.
Donations and contributions to 501(c)(6) organizations, however, are not tax-deductible. These organizations may hold fundraisers or require membership dues, but the members cannot deduct these funds from their taxes except in certain cases in which a business makes a contribution and treats it as an expense.
The U.S. tax code expressly and strictly prohibits 501(c)(3) organizations from participating in political activity. In contrast, 501(c)(6) organizations may participate in limited political activity, and may endorse or contribute to political candidates. If a 501(c)(6) does participate in politics, however, the funds it spends in political pursuits are subject to taxes.
Because the IRS allows tax-exempt status for 501(c)(3) organizations based on their support of the public good, these organizations must consistently serve public purposes. They may not exist to exclusively support an individual, and 501(c)(3) organizations must strive to maintain public support to maintain operations.
While a 501(c)(6) organization may work toward public purposes, its main objective is to support its own members. For this reason, public recognition and support is less important for 501(c)(6) membership clubs.
IRS Filings and Forms
To become 501(c)(3) tax exempt, an association must first form as a trust, corporation or association, according to the IRS, and declare a public purpose it intends to serve. The organization’s leaders then can file IRS Form 1023, the Application for Recognition of Exemption Under 501(c)3. A streamlined Form 1023-EZ also is available. To receive 501(c)6 tax-exempt status, an organization must complete and file IRS Form 1024, the Application for Recognition of Exemption.
All necessary forms are available for free from the IRS website. If you need assistance completing these forms, a variety of free and paid services are available.
- IRS: Organizational Test - Internal Revenue Code Section 501(c)(3)
- IRS: Business Leagues
- Non-Profit Law Center: 501(c)(3) and (6) Organizations: A Comparative Analysis
- Foundation Group: The Other Nonprofits – 501(c)(4), 501(c)(6) & 501(c)(7)
- Kenan Farrell: 501(c)(3) or 501(c)(6)?
- IRS: 501(C)3 Application Process
- IRS: Form 1024