NONPROFIT QUICKTIPSSM
An electronic publication of Pfau Englund Nonprofit Law, P.C.
Disclaimer: This publication is designed to provide accurate information in regard to the subject matter covered. However, it is not intended to provide legal or other professional advice. If legal advice is required, the services of a competent professional should be sought.
Are Your Associate Member Dues Taxable?
Over the past five years the Internal Revenue Service has looked more closely at whether to tax the dues of members of nonprofit groups who are not given full voting and other membership benefits. In some cases, the IRS believes these "associate members" are encouraged to join the group merely to allow the association to sell the less-than-full-members products and services, such as insurance and affinity credit cards, or to provide the associate members with access to its "real members" for marketing purposes. Since a 1995 Tax Court case in which associate member dues were found to be taxable, the IRS has issued a number of rulings and guidance to help nonprofit groups know when their dues income is taxable. Based on these rulings and guidance, it appears that the dues of associate members will not be taxable if:
the purpose of forming the associate member category is to further the association’s exempt purposes, and not merely to sell these associate members goods or services produced by an unrelated business activity, e.g., insurance programs or affinity credit cards; and,
the associate members actively participate in the exempt activities of the association, including serving on committees, attending seminars and other events, writing for the association’s publications and the like.
The IRS may also look at whether the dues paid by the associate members are in proportion to the benefits the associate members receive. If associate members pay higher dues than regular members but receive fewer benefits, this may raise a red flag for the IRS.
Nonprofit groups with an associate member category should consider taking the following steps to reduce their risk that their associate member dues income will be considered taxable:
set-forth in writing the purpose(s) for which the associate member category is created and how associate members further the exempt purposes of the association;
review and revise as appropriate informational materials regarding the benefits of associate membership, examining the extent to which these materials promote access to potential clients and/or the availability of goods or services unrelated to the association’s exempt purpose (such as insurance);
determine and set-forth in writing the rationale for the associate member dues assessed, particularly if associate member dues are higher than the dues of regular members with full voting rights; and,
document the extent to which associate members participate in the exempt activities of the association, including the number/percentage of associate members who participate in education activities, serve on committees, write for its publications and so forth.
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