If you operate or have management responsibilities within a nonprofit organization, you may want to evaluate whether it satisfies the requirements of Internal Revenue Code 501(c)(4). In the event it does, there are a number of tax benefits of which the organization can take advantage that are only available to nonprofits that obtain tax-exempt status with the IRS.
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Qualifying Under 501(c)(4)
Before you can take advantage of the tax benefits of 501(c)(4), you must ensure that the operational and financial activities of the organization satisfy IRS requirements. This code section is only applicable to civic leagues and other entities that operate exclusively to promote social welfare in the community or a group of employees within the same municipality, such as volunteer firefighter companies and homeowners’ associations. Moreover, your organization’s earnings must not provide its owners with payments of any profit. Rather, all funds must be reinvested in furthering the organization’s nonprofit mission — which includes ordinary operating expenses, such as employee salaries and office rent. If these fundamental requirements of 501(c)(4) are satisfied, you should consider submitting an application for tax-exempt status with the IRS using Form 1024.
No Income Tax
If the IRS approves your application, the main benefit is that the organization no longer has to pay income tax on the funds it earns in excess of operating expenses — which are fully taxable to a profit-driven company. Provided the organization continues to further its mission and complies with all tax filing obligations — exemption from the income tax will continue in future tax years.
One of the best things about obtaining tax-exempt status is the incentive the federal government provides taxpayers to make charitable donations. Taxpayers are eligible to deduct the value of all donations they make to 501(c)(4) organizations, regardless of whether it’s in the form of cash or property. Therefore, your nonprofit organization can begin soliciting tax deductible donations from taxpayers to increase its annual tax-free earnings. However, if you don’t obtain tax-exempt status from the IRS, donors are unable to deduct their donations and will likely divert their contributions to organizations that do.
Shorter Tax Returns
Although a tax-exempt 501(c)(4) organization doesn’t have to pay income tax, annual tax return filings are still necessary each year. The IRS uses these returns for informational purposes to insure that the organization continues to adhere to the requirements of §501(c)(4). However, if you operate or work for a small 501(c)(4) that typically receives $50,000 or less of annual gross earnings — which includes all funds the organization raises through membership fees and donations — you can satisfy the tax compliance obligations of the organization by preparing a short return on Form 990-N. Form 990-N is commonly referred to as an “e-postcard” because it requires such minimal information that the form is the size of an average postcard. Once you fill in the tax year, the organization’s name, mailing and website address, employer identification number, the name and address of the organization’s principal officer and a certifying statement that gross receipts are normally $50,000 or less — the tax return is complete.