Starting a tax-exempt organization can be a daunting task. Once you have an idea—and you’re sure it’s a good idea that can help people—where do you start? What are the steps to get the correct tax-exempt status? If your organization is working to improve conditions or products in labor, agriculture, or horticulture, you might be eligible for 501(c)(5) nonprofit status.
With enough willpower and knowledge, you can make your great idea a reality and maintain the correct tax exemption by following a few easy steps.
What is a 501(c)(5)?
Section 501(c)(5) is the part of the US Internal Revenue Code that allows for federal tax exemption of labor, agricultural, or horticultural organizations. With 501(c)(5) nonprofit organization status, your organization is exempt from federal income taxes.
More than just conducting activities related to those categories, 501(c)(5) nonprofit organizations focus on bettering conditions for workers or practitioners in those fields in a variety of ways. They function similarly to any other nonprofit, with a mission to help the communities they target.
Although there are fewer types of organizations that qualify for 501(c)(5) vs 501(c)(3) status, which accounts for many different kinds of nonprofits, 501(C)(5) organizations still make up a big chunk of the over 1.5 million nonprofit organizations in the United States.
Types of Organizations Exempt Under Section 501c5
Unlike the 501(c)(3) tax-exempt designation, 501(c)(5) only covers three kinds of organizations: labor, agricultural, and horticultural organizations. Read on to see how your organization might fit into these categories.
1. Labor Nonprofit Organizations
These organizations are made up of a group of workers in a certain trade or industry like factory workers, electrical workers, or teachers. Many labor unions are eligible for 501(c)(5) status. Having said that, the goal of these organizations has to be on collectively bargaining with an employer to negotiate better earnings, working conditions, or even benefits.
2. Agricultural Nonprofit Organizations
Fishing, raising livestock, forestry, and growing and harvesting crops all qualify as agriculture. In other words, if your organization takes part in this industry, you might qualify as an agricultural organization.
More specifically, a 501(c)(5) organization conducts activities like promoting agricultural cooperation amongst private farmers, testing soil to increase soil nutrition levels or other kinds of betterment initiatives for members.
3. Horticultural Nonprofit Organizations
Although all horticultural organizations can be considered agricultural organizations, it doesn’t work the other way around. Horticultural organizations focus specifically on the cultivation of plants for functional or decorative uses.
Both agricultural and horticultural organizations must focus on improving working conditions or overall supporting agricultural endeavors in order to be eligible as a 501(c)(5) nonprofit organization.
By now you might have understood what “agriculture” is, but knowing the specific terminology the Internal Revenue Code uses to define its activities is essential.
How Does the Internal Revenue Code (IRC) Define “Agriculture” for 501(c)(5) Purposes?
To get more specific with a term as broad as “agriculture,” Section 501(g) of the IRC uses the following activity definitions for 501(c)(5) purposes:
- Land cultivation like maintaining soil quality, planting seed, and harvesting crops
- Fishing and harvesting other aquatic resources (not mineral resources)
- Raising, feeding, and managing livestock, including both domestic farm animals like hogs, cattle, and chickens, and animals raised in captivity for their pelts or fur
Although it might seem obvious, having these specific definitions as part of the IRC protects both the IRS and 501(c)(5) exempt nonprofits from any issues or confusion down the line. Therefore, knowing the exact definition is an important step toward deciding if your organization could apply for 501(c)(5) nonprofit status.
501(c)(5) Tax Status
What does it mean to be “exempt” under 501(c)(5)? Essentially, 501(c)(5) organizations are exempt from all federal income tax, except for any funds used for political activities or lobbying.
Unlike 501(c)(3), contributions from members or other supporters to 501(c)(5) organizations are not tax-deductible as charitable contributions. However, some contributions like labor union dues are considered business expenses and might be tax-deductible.
Some agricultural nonprofit organizations offer educational programming, and they might qualify as both 501(c)(5) and as 501(c)(3) educational organizations. It’s up to the organization to decide which tax status works best for them and their mission, but most decide to pursue 501(c)(3) status so individual contributions are tax-exempt as charitable donations. Moreover, this can incentivize donors who are looking for a break in their taxes.
Criteria to Qualify for 501(c)(5) Status
If you want to start a nonprofit that works in labor, agriculture, or horticulture, you might think you’re ready to apply for 501(c)(5) status. But there are a few other requirements to double-check first!
Check these IRS Requirements for 501(c)(5) tax exemption:
- No portion of the net earnings of the organization can be pocketed or enjoyed by any particular member
- The goal of the organization has to be to:
- Improve the conditions of people working in labor, agriculture, or horticulture
- Improve the quality of products in those fields
- Work to make those occupations more efficient
It’s important to note that labor organizations are permitted to directly pay benefits to members, but the main goal of the organization must be to negotiate for better working conditions on behalf of those members—not to generate a profit for them.
Steps to Start a 501(c)(5) Organization
Once you’ve decided you might qualify for 501(c)(5) nonprofit status, it’s time to work toward creating your organization. It might feel difficult and overwhelming to get started, but by following a few easy steps you can feel empowered to get your nonprofit off the ground.
Step #1. Create your Organization
You have a great idea: an organization that makes life better for certain professions or trades. The first step toward making your idea a reality is to establish a nonprofit organization with the following elements:
- A concrete mission and mission statement
- A board of directors with leaders who are passionate and knowledgeable in the area your organization works in
- Bylaws that establish how your organization will run
- Articles of Incorporation filed with the Secretary of State in the state the organization is located
Once you have these items established, you can start on the next step.
Step #2. Get an Employer Identification Number (EIN)
An Employer Identification Number is required by the IRS to identify your organization on a variety of documents; this includes Form 1024, which you’ll fill out in the next step.
First, be sure you have a valid Tax Identification Number for the person filling out the form; this can be a social security number, an Individual Taxpayer Identification Number (ITIN), or even another EIN.
The person who applies for your EIN should be the responsible party, meaning the entity or person who has primary control over the organization.
You can apply online, but keep in mind that the application must be filled out all in one go and your session will time out after fifteen minutes of inactivity; taking some time to familiarize yourself with the online application before you plan to submit it is essential.
Step #3: Submit Exemption Application (Form 1024)
You’re ready to submit your Form 1024. But here are some things to keep in mind:
- Be sure you have the right form. There are a few versions of the form, but for 501(c)(5) nonprofit organizations you want Form 1024, which can be found online.
- Take your time preparing your form. Because this 22-page form asks for a lot of information. Make sure you have everything you need, also carefully review the instructions.
- Be sure to check the IRS user fee list to see how much of a fee you’ll need to pay to apply for an exemption.
- Submit your Form 1024; you can do it online at pay.gov or through the mail at:
Internal Revenue Service
P.O. Box 12192
Covington, KY 41012-0192
Being sure you have all elements of the form properly filled out means your application can be processed as quickly as possible.
501(c)(5) Annual Filing Requirements
To maintain your 501(c)(5) exempt status, you have to abide by the annual filing requirements to show that your organization is following good nonprofit practices. This means filling out a Form 990 which provides updates on your organization’s activities and finances.
Although there are three versions of Form 990; so you should review the financial status requirements for each to confirm which best suits your nonprofit.
Once you figure out which form you need to use, review the instructions and be sure you fill out all schedules relevant to your organization.
Because of the nature of 501(c)(5) nonprofit organizations, the exempt status allows for organizations to partake in campaign and lobbying activities to advance their mission and the interests of their members.
Although there’s one catch; it is that political expenses are not tax-deductible. If an organization wishes to lobby, they must either make their members aware of what percentage of membership dues support lobbying or they must pay a tax on the sum of those lobbying costs.
When it comes to political campaigning, a 501(c)(5) can participate as long as campaigning isn’t the organization’s main mission— but rather a way for the organization to support its members and fulfill its original mission.
Once you understand what being a 501(c)(5) nonprofit organization means, you can decide if this particular tax-exempt status is right for your new organization.
At the end of the day, tax exemption statuses are meant to help organizations doing important work in their communities. So, working to improve the conditions, product, or efficiency in your field—whether that’s labor, agriculture, or horticulture—are vital endeavors, and exemption is one way to be appreciated for all your work.
Be sure to check out our nonprofit blog for more nonprofit management tips and tricks. Also in case, you’re still not sure if 501(c)(5) is the right status for your organization, our guide to registering a 501(c)(3) nonprofit organization should be helpful.