When a new local chapter of the APA is being created, founding members may have many questions regarding the best policies and procedures the chapter should adopt. APA’s Local Chapter Guide (available by clicking on the “Grow Your Chapter” link on the Chapters page of the APA website) provides detailed information to answer many of these questions.
One question APA’s Chapter Relations Department regularly encounters is whether the chapter should request tax-exempt status under §501(c)(6) or §501(c)(3) of the Internal Revenue Code (IRC). This blog post will help you understand the differences between the entity types so you can begin to answer that question for your chapter.
Before I get into the answer, though, I do need to provide a legal disclaimer. This blog post is meant to be a broad overview of how these entities are defined under the tax code. This is not intended to, and does not, constitute legal advice. You should consult an attorney to obtain legal advice that is specific to the needs of your chapter.
The Relationship Between APA National and Local Chapters
As you develop your chapter’s governing documents, the first thing to know is that each affiliated chapter operates autonomously within the APA National Policy Guidelines as a nonprofit educational organization. This means each individual chapter operates independently and does not have a direct financial relationship with APA National. The local chapters and the national organization share and support the same goals – the most important being education for the payroll profession.
The Difference Between Nonprofit and Tax-Exempt Entities
One key distinction is the difference between nonprofit and tax-exempt entities. Nonprofit and not-for-profit entities are given that status under state law only. The granting of nonprofit status does not confer an exemption from federal income tax to these organizations. To be tax-exempt, these entities must meet certain requirements under the IRC. The terms “501(c)(3)” and “501(c)(6)” come from the IRC. Entities may be exempt under either one of these IRC sections.
501(c)(3) vs. 501(c)(6) Entities
Most people are familiar with 501(c)(3) entities as they are often referred to as charitable organizations or “charities.” To be tax-exempt under IRC §501(c)(3), an entity must be organized and operated exclusively for one of the purposes outlined in the IRC. This includes corporations “organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes.” There are certain limitations on 501(c)(3) organizations as well. They may not be organized or operated for the benefit of private individuals, and their profits may not be used to benefit a private shareholder or individual. There are also restrictions on 501(c)(3) organizations as to the amount of political lobbying they may engage in, and they may not participate in political activities in support of or against political candidates. If an APA local chapter seeks an exemption under §501(c)(3), it is likely to do so based on having a primary purpose of education.
Entities that are tax-exempt under IRC §501(c)(6) are generally referred to as “business leagues.” A business league under §501(c)(6) is a membership organization characteristically supported by dues. Although an organization may receive a substantial portion (or even the primary part of its income) from nonmember sources, its membership support – in the form of dues paid to or involvement in the organization’s activities – must be meaningful. This section of the IRC is where most of APA’s affiliated local chapters receive their tax-exempt status. A business league is an association of people with a common business interest who will promote this common interest. It is not a regular business with a goal of being profitable. The business league must be devoted to the improvement of business conditions of one or more lines of business (as distinguished from the performance of particular services for people). The business league must show a particular trade or the interests of the community will be advanced by its actions. No part of its net earnings may benefit any private shareholder or individual, and the league may not be organized for profit.
More Information
APA’s Local Chapter Guide provides information about 501(c)(3) and 501(c)(6) entities and the process through which an organization applies to the IRS for the exemption. The IRS website also has a wealth of information including a Charities and Nonprofits webpage and a page dedicated to the Life Cycle of a Business League (Trade Association).
Share below your experiences determining your chapter's status.
Curtis E. Tatum, Esq., is APA’s In-House Counsel and Director of Federal Payroll Compliance.
