We are a nonprofit trade association with about 125 members, almost all of whom are small business entrepreneurs. We have a significant surplus in the bank from vendor endorsements we get in connection with our services. Can we distribute some of it to our members to help them keep their businesses alive during the coronavirus situation? We understand that they would have to pay tax on what they receive.
Probably not. A 501(c)(6) trade association must be organized to promote a common business interest of its members and has a prohibition, like a 501(c)(3) charity, against private inurement of any private shareholder or individual. A division of your tax-exempt “profits” from the vendors would most likely trigger that prohibition against private benefit to your members and you could lose your exemption. The test is not whether your members would pay an income tax on the rebate, but whether the organization itself is living up to its own tax requirements.
Add new comment