What Are 501(c)4 Organizations?

By Tom Streissguth

Under federal tax law, an organization that promotes social welfare, and operates as a non-profit, can identify itself as a 501(c)(4) for tax purposes. The Internal Revenue Service sets the rules and guidelines for these groups, reviewing their statuses from time to time to ensure they are meeting legal requirements.

Under federal tax law, an organization that promotes social welfare, and operates as a non-profit, can identify itself as a 501(c)(4) for tax purposes. The Internal Revenue Service sets the rules and guidelines for these groups, reviewing their statuses from time to time to ensure they are meeting legal requirements.

Tax-Exempt Status

A 501(c)(4) organization is exempt from federal taxes; however, donors may not deduct contributions to these groups. Most states also extend tax-exempt status to 501(c)(4)s. According to IRS regulations, a 501(c)(4) must operate to promote the general public welfare; it may not benefit a private company or individual, or serve a select group of citizens. The IRS will bar a 501(c)(4) from simply operating as a social or recreational club, or carrying out business in a manner similar to that of a private, for-profit company. The organization may keep its donors anonymous, but it is not authorized to accept tax-deductible contributions as other charitable groups may.

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Lobbying

In the matter of legislative lobbying, the IRS makes an important distinction between 501(c)(3) and 501(c)(4) organizations. The former are tax-exempt groups that may not attempt to influence specific legislation; the latter may support new laws and regulations that are relevant to the area of interest of the group. The AARP, or American Association of Retired Persons, for example, is a 501(c)(4) that may lobby for legislation on behalf of its members; a division known as the AARP Foundation is a 501(c)(3) that receives federal funds and, as a tax-exempt charity, may not attempt to influence legislation.

Disclosure

If a 501(c)(4) does carry out lobbying, the IRS requires it to disclose to its members the percentage of its dues or income that it devotes to that purpose. The group may not take part directly in individual political campaigns. It may carry out political advocacy, but this may not be its primary purpose; furthermore, any expenses used for this activity must be disclosed to its members and may be subject to income tax

Excess Benefit Transactions

In the matter of fees and compensation, the IRS looks closely at the records of a 501(c)(4) in search of “excess benefit transactions.” If a person or group earns money from the non-profit in excess of the value of services rendered, that transaction is subject to federal income tax. An excess benefit transaction can include grants, loans, wages or any similar benefit.

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What is the Difference Between a 501C3 & 501C4?

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Rules for 501(c)3 Corporations

Many charities pursue 501(c)(3) status because it allows organizations to avoid certain taxes and accept tax-deductible donations. The Internal Revenue Service grants 501(c)(3) status to charitable organizations that meet the requirements set forth in the Internal Revenue Code. While charities are first organized under state law, the IRC restricts the activities and profit distributions of 501(c)(3) organizations, also known as exempt organizations.

501(c)(3) Types

Federal taxes are a significant expense for many businesses, but not for exempt non-profits. Non-profit charities that are organized under Internal Revenue Code Section 501(c)(3) are generally tax-exempt, and their donors usually get tax breaks for supporting them. The IRS divides these charities into two categories: public charities and private foundations.

IRS and Laws Prohibiting Nonprofits From Political Activity

Federal tax laws prohibit nonprofit organizations from engaging in partisan political activity. Tax-exempt organizations may run afoul of the Internal Revenue Service if those groups take part in political campaigns for or against a candidate for public office. Nonprofits that violate IRS guidelines and U.S. laws prohibiting nonprofits from partisan political activity risk losing their tax-exempt status and may also incur tax penalties.

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