A 501(c) organization is a nonprofit organization recognized under the U.S. Internal Revenue Code as exempt from federal income tax. There are many kinds of 501(c)s, the most widely-known of which are 501(c)(3)s—or charitable organizations. Unions, however, fall specifically under the category of 501(c)(5)s. Below are the distinguishing characteristics of 501(c)(5) organizations that enable unions to qualify as tax-exempt entities.

What is Section 501(c)(5)?

Section 501(c)(5) of the Internal Revenue Code provides a federal income tax exemption for labor, agricultural, or horticultural organizations. As labor organizations, unions fall under this definition for tax purposes.

Exemption Requirements

To qualify as a 501(c)(5), an organization must meet the following requirements:

1. The organization’s net earnings may not benefit any one member.
2. The organization’s primary purpose must be to better the working conditions of workers engaged in labor, agriculture, or horticulture, improve the grade of their products, or develop greater efficiency within its members’ occupations.

In general, an organization is not considered a 501(c)(5) organization if its primary activity is to receive, hold, invest, disburse, or otherwise manage funds associated with savings or investment plans.

Lobbying and Political Activities

Unlike 501(c)(3) organizations, which face greater restrictions regarding their participation in political and legislative activities, 501(c)5 organizations are permitted to achieve their exempt purposes through lobbying for pertinent legislation. 501(c)(5)s that engage in lobbying may be required either to notify members of the percentage of dues allocated to lobbying activities or to pay a proxy tax.

Direct or indirect participation or intervention in political campaigns—either in support of or in opposition to a candidate for public office—is not permitted as part of a 501(c)(5) organization’s exempt purpose. However, the organization can participate in certain political activities as long as it is not the group’s primary activity. Any expenditures related to political activities, however, may be subject to tax.

Reminder about Unrelated Business Income Tax

Though unions are generally exempt from paying income tax under Section 501(c)5, they may still be subject to tax for income classified as “unrelated business income.” Unrelated business income (UBI) is income from a trade or business that is regularly carried on and not substantially related to the exempt purpose of the organization. For more information about Unrelated Business Income Tax (UBIT), please refer to last month’s thought leadership article.

Partner with RBT CPAs

For all matters accounting, tax, audit, and business consulting-related, please don’t hesitate to reach out to our team at RBT CPAs. Our experts are here to assist and advise you. Contact us today and find out how we can be Remarkably Better Together.