Association Tax Issues

Association Tax Issues

A. Tax Exemption Status 501 (c)(6) or 501 (c)(3)

The IRS reviews the budget, purposes, programs and methods for raising funds, and methods for distributing assets upon dissolution of the corporation. Not for profit organizations may be determined by the IRS to be exempt from federal income taxation under IRS code 501 (c)(3) or 501 (c)(6).

1. Each affiliate association and affiliate foundation must seek a definitive Internal Revenue Service (IRS) ruling on its tax-exempt status and have a formal letter of recognition from the IRS on file. ADA's legal advice recommends affiliate membership associations file as 501 (c)(6) organizations.

Section 501(c (6) organizations:

  • Can receive dues or other payments, which will be deductible to the donor if they serve a business purpose.
  • May further its exempt purposes through lobbying as its primary activity without jeopardizing its exempt status. However, a 501(c)(6) organization that engages in lobbying may be required to either provide notice to its members regarding the percentage of dues paid that are applicable to lobbying activities or pay a proxy tax.

If the affiliate maintains a foundation, it must file under the 501(c)(3) IRS tax code. The foundation must limit its political activities and function independently from the 501(c)(6) organization, including filing separate tax returns.

Section 501(c)(3) organizations:

  • Can engage in lobbying only with very narrow boundaries and only if it is 'insubstantial.'
  • Can make a special election to devote a certain small percentage of their assets to lobbying each year, but the rules are complicated and the penalties for stepping over the boundaries are severe.
  • Can receive voluntary tax-deductible charitable contributions.
  • Funds raised must be used for charitable, educational, or research purposes.

2. It is important to know if your affiliate is exempt under section 501(c)(6) and/or 501(c)(3). If it is not a 501(c)(6), you should plan to change your status within the next 12 months. To inquire if your affiliate is exempt under section 501(c)(6) or 501(c)(3), call 1-877-829-5500 and provide your federal ID number.

B. Filing Taxes Annually

1. Your affiliate should anticipate filing taxes with the IRS by the fifteenth day of the fifth month after the end of a chapter's fiscal year. The registered agent, LexisNexis™ Document Solutions will be the authorized receiver of official tax notices and will forward them to you promptly.

FORM 990 & 990EZ

Form 990 is an annual information return or an annual tax form that nonprofits file with the IRS. This public document provides information that allows the IRS to determine whether the organization continues to fill the requirements for its tax-exempt status. Form 990 explains the mission and program activities of the organization. The organization's financial information details revenues, expenses, and net assets.

Although the 990 form is filed by exempt organizations if gross receipts normally exceed $25,000, all affiliates are required to file a 990 or 990EZ with the IRS and send a copy to ADA annually.

990EZ short form can be used if the affiliate meets both of the following criteria:

  • Gross receipts are under $100,000 and
  • Total assets at the end of the year are under $250,000

C. Lobby Expense/Reporting

Effective January 1, 1994, dues paid to a tax-exempt organization, other than a 501 (c)(3), are no longer fully deductible by the dues paying member.

ADA is responsible for including a statement on the dues notice identifying the non-deductible portion of dues attributable to lobbying. Since ADA prepares dues notices and rebates a portion of those dues to the affiliate associations, affiliates are responsible for notifying ADA by October 1 of year, an estimate of the Affiliates projected or budgeted lobbying expenditures for its next fiscal year. By reporting lobbying activities to ADA, the affiliate and ADA can avoid paying a proxy tax on lobbying activities. Affiliates also report lobbying expenditures on Form 990, Return of Organizational Exempt from Income Tax.

If questions are raised by your auditor or by an IRS audit, please contact the Vice President of Finance at ADA Headquarters, 800/877-1600, ext., 4730.