If a nonprofit organization is organized and operated for charitable purposes, it may qualify for tax exemption under Section 501(c)(3) of the Internal Revenue Code. On the other hand, if a nonprofit is organized to promote the common business interests of its members and does not engage in regular business activities that are typically carried on for profit, it may be exempt under Section 501(c)(6) of the Code.
However, some organizations may have both charitable and business-related goals. For example, a medical association may aim to improve public health policy and provide educational materials to the public and its members, as well as offer business tips and networking events to its members. In such cases, it may be unclear which tax-exemption classification is appropriate.
To make the determination, the organization should consider whether its primary purpose is to benefit its members or the general public. If it primarily benefits its members, it would likely qualify for tax exemption under 501(c)(6). Otherwise, it may qualify under 501(c)(3).
It’s important to note that both 501(c)(3) and 501(c)(6) organizations are exempt from federal income taxes on income related to their exempt purposes. However, 501(c)(3) organizations are limited to certain exempt purposes, such as charitable, educational, religious, scientific, and literary purposes. In contrast, 501(c)(6) organizations aim to promote the common business interests of their members.
Additionally, contributions to 501(c)(3) organizations are generally tax-deductible, while contributions to 501(c)(6) organizations are not. However, payments of dues to 501(c)(6) organizations may be deductible as ordinary and necessary business expenses.
501(c)(3) organizations are generally prohibited from engaging in political campaign intervention activities, while 501(c)(6) organizations may do so as long as it is not their primary activity.
Overall, each organization’s tax-exemption classification is specific to its unique circumstances, and several key considerations should be evaluated to determine the appropriate classification.