Section 501(c)(5) of the Internal Revenue Code provides a tax exemption for labor, agricultural and horticultural organizations. This exemption is awarded to organizations whose primary purpose is to improve the conditions of those engaged in labor, agriculture or horticulture, or improve the products or efficiency in these areas. In order to be recognized by the IRS as a 501(c)(5), the organization must take a number of steps to demonstrate its exempt purpose.
Creating the Organization
Before filing any forms with the IRS, your organization must first establish a board of directors, bylaws, mission, and file articles of incorporation with the state. The board will determine the overall direction of the organization and draft bylaws and a mission that is in line with its exempt purpose. A 501(c)(5) does not have to be organized as a corporation, but it is required to have a board of directors. Further, articles of incorporation must be filed with the secretary of state in compliance with the state laws where the organization is located.
To receive exempt status as a labor organization, the organization must be an association of workers who have joined together to collectively bargain with their employer to improve their working conditions, wages and similar benefits. Although labor organizations may pay accident, sick, death and other benefits to individuals because it improves the workers' overall working conditions, no single member may gain any benefit that affects him alone.
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Agricultural and Horticultural Organizations
Exempt organizations under the category of agriculture and horticulture include associations that participate in activities such as conducting soil tests for members, promoting cooperative agricultural activities, and other activities that better the conditions of those engaged in agriculture or horticulture. In contrast to labor organizations, agricultural and horticultural organizations may not provide welfare or financial aid to any member of the organization under any circumstances.
Filing Form 1024
Once the organization has been formed, and you have determined you fall under the exempt category of either labor organizations or agricultural and horticultural organizations, you may file for 501(c)(5) status by completing Form 1024. If you do not already have an Employment Identification Number (EIN) for your organization, you must apply for one on the IRS website. The EIN will be used to identify your organization on all IRS forms. In filling out Form 1024, you must demonstrate that your organization is exempt under 501(c)(5) by explaining how your activities are in line with the IRS's definition of labor or agricultural and horticultural organizations. Further, you must submit detailed information about the organization's finances and show how these are used to further your mission. Once submitted, the IRS may take several weeks up to several months to recognize your organization as exempt.
After the IRS recognizes an exempt organization, the 501(c)(5) must file an annual 990 form, with updates on the activities and finances of the organization. If not filed, the organization may face penalties or ultimately lose its 501(c)(5) exempt status. Further, exempt organizations are required to pay income on any "unrelated business income" that is not substantially related to its exempt purpose.
Elizabeth Rayne earned her J.D. from Penn State University and has been practicing law since 2009, advising clients on issues ranging from employment law to nonprofit management. For two years, she served as a contributing editor for the "Vermont Environmental Monitor."