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.
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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.
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.
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.
References & Resources
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