A nonprofit organization formed under a state statute can apply for exemption from federal income taxes under one of the various provisions of Internal Revenue Code (IRC) section 501(c). The most popular section is 501(c)(3), which exempts public charities from paying taxes on income and also allows donors to those charities to claim a tax deduction for their donation against their income. Other sections of 501(c), such as 501(c)(4), which exempts civic leagues and social welfare organizations, allow other types of organizations to apply for tax-exempt status, but donations to these organizations are not tax-deductible. The benefit of being a 501(c)(3) comes with increased restrictions on the types of activities the nonprofit can engage in and support.
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Whether a nonprofit qualifies for tax-exemption under 501(c)(3) or (4), it is still a corporation that must be formed under state law by filing articles of incorporation. A corporation is a distinct legal entity with many of same powers as a real person, including the ability to invest money in ways that advance its corporate purposes. Thus, although a 501(c)(3) nonprofit can do anything with its money that a person can do, including donating it to another entity, that power is limited by certain provisions of the Internal Revenue Code that predicate the privilege of being tax-exempt on the corporation's agreement to only use its income in certain ways.
A 501(c)(3) is authorized under state and federal law to engage in any activity that furthers the charitable purposes articulated in its articles of incorporation and does not conflict with the law, including donating money. However, this grant of authority specifically prohibits 501(c)(3) nonprofits from engaging in any activities that fall outside of its statement of purpose. Organizations that violate this principle may have their tax-exempt status revoked. For example, an organization that promotes student achievement can donate money to a college to set up a scholarship program, but it cannot give money to an animal shelter to replace equipment. Although helping the shelter is a worthy cause, it falls outside the scope of the nonprofit's charitable purpose. So, theoretically, a 501(c)(3) can donate money to a 501(c)(4) nonprofit, depending on the circumstances.
A 501(c)(4) civic league or social welfare organization can conduct a wide range of activities and still maintain its tax-exempt status. Some of these activities are permissible for a 501(c)(4) but prohibited for a 501(c)(3). The IRC only allows 501(c)(3) nonprofits to engage in very limited lobbying and no political activity. Although a 501(c)(3) can donate to a 501(c)(4), it must exercise caution because unrestricted donations to a 501(c)(4) can result in loss of tax-exempt status. For example, a 501(c)(4) such as a trade union is allowed to lobby the government and engage in political activity on behalf of candidates, but these activities are prohibited for 501(c)(3) charities. A 501(c)(3) can donate to a 501(c)(4), as long as the donation is restricted to a charitable purpose that aligns with the organization's mission and does not violate the 501(c)(3) nonprofit's eligibility.
It is not unusual for national and international nonprofits to set up 501(c)(3) arms of their 501(c)(4) organizations. The 501(c)(3) can accept donations and provide donors with a tax deduction, while the 501(c)(4) can engage in unlimited lobbying and political activity. The 501(c)(3) can donate money to the 501(c)(4) to fund specific projects that fall within the permissible scope of its activities. An example is Greenpeace, an advocacy 501(c)(4), which operates the Greenpeace Fund, a 501(c)(3).
References & Resources
- Internal Revenue Service: Publication 557: Tax-Exempt Status for Your Organization - Dedication and Distribution of Assets
- Internal Revenue Service: Publication 557: Tax-Exempt Status for Your Organization - 501(c)(4) - Civic Leagues and Social Welfare Organizations
- Internal Revenue Service: Publication 557: Tax-Exempt Status for Your Organization -Lobbying Expenditures
- Internal Revenue Service: Publication 557: Tax-Exempt Status for Your Organization - Political Activity
- Foundation Group: The Other Nonprofits - 501(c)(4), 501(c)(6) & 501(c)(7)
- American Bar Association: Model Nonprofit Corporation Act
- Philanthropy New Digest: Can a 501(c)(3) Donate or Give Money to Another 501(c)(3)
- Internal Revenue Service: Exempt Organizations -Technical Instruction Program for IRC 501(c)(4) Organizations
- American Institute of Philanthropy: Sorting Out Nonprofit Pairs