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

By Wayne Thomas

Many nonprofit organizations are created for the purposes of providing some benefit to the public. Depending on the specific civic purpose of the organization and its anticipated level of involvement in politics, it may be eligible for a federal income tax exemption under subchapter 501(c)(3) or 501(c)(4) of the Internal Revenue Code. Knowing the eligibly requirements and costs and benefits to each classification will help you determine the best way to register your nonprofit.

Many nonprofit organizations are created for the purposes of providing some benefit to the public. Depending on the specific civic purpose of the organization and its anticipated level of involvement in politics, it may be eligible for a federal income tax exemption under subchapter 501(c)(3) or 501(c)(4) of the Internal Revenue Code. Knowing the eligibly requirements and costs and benefits to each classification will help you determine the best way to register your nonprofit.

Overview of Exempt Nonprofits

Nonprofits are business that are created for a purpose other than generating profit. An organization is not precluded from raising revenue, but the funds must be used to support the purpose of the nonprofit and not paid out to directors, members, or staff beyond reasonable compensation. Although this definition is expansive, many nonprofits choose to be subject to more limited rules created by the Internal Revenue Service. Adherence these guidelines can make the nonprofit eligible for a federal tax exemption, meaning that it does not need to pay income taxes. Further, depending on the laws of the state in which it is formed, certain sales, property, and state income tax exemptions may be pursued once the federal exemption is obtained.

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Types of Organizations

According to IRS rules, public charities, private foundations and organizations that promote a religious, scientific, charitable, or literary purpose may pursue a tax exempt classification known as 501(c)(3) status. Examples of these organizations include churches, youth summer camps, and museums. By contrast, civil leagues and local associations that further a social welfare objective but do not quite rise to the level of a charitable organization may pursue 501(c)(4) status. Examples of these organizations are the Lions Club and homeowners' associations.

Lobbying

One fundamental difference between 501(c)(3) and 501(c)(4) organizations, is in their ability to freely conduct political or lobbying efforts. These activities include attempts to help pass or repeal legislation, as well as outreach to gain public support or opposition to legislation. 501(c)(3) nonprofits are limited to conducting only "insubstantial" lobbying efforts, determined by the size of the organization. Typically, insubstantial means that you would allocate less than 10 percent of the nonprofits total operating budget. If the nonprofit is found to have engaged in substantial lobbying efforts, it will lose its exempt status. Further, these organizations are prohibited from supporting or endorsing any candidate for public office. By contrast, 501(c)(4) organizations may engage in unlimited lobbying and promotion of candidates, provided that these efforts dovetail with the purpose of the organization.

Deductions

501(c)(3) and 501(c)(4) nonprofits also differ when it comes to deductions available to individuals and businesses that donate to the organization. Donations to a 501(c)(3) are entirely deductible as a charitable contribution on the donor's tax return. In contrast, donations made to a 501(c)(4) are generally not deductible. This benefit to 501(c)(3) nonprofits can provide a greater incentive to donors, who otherwise might not contribute. However, depending on the nature of the donor's business, certain contributions to a 501(c)(4) may be considered deductible as business expense. Determining when this deduction applies can be complicated, and donors should be advised to contact an accountant before taking the deduction.

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Can a 501(c)(3) Donate to a 501(c)(4)?

References

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Non Profit Donation Rules

Nonprofits are businesses organized for a purpose other than generating profit. For that reason, the survival of a nonprofit often depends on acquiring donations from the public. These organizations, however, must comply with state and federal laws that place certain restrictions on the solicitation and use of donated funds. Understanding how these rules affect your nonprofit can ensure the continued existence of the organization.

What Is a 501C Non Profit?

Many nonprofit organizations pursue 501(c), or exempt, status from the Internal Revenue Service for tax benefits, and in some cases, to increase donations to the nonprofit. While there are 28 different types of exempt organizations, among the most common include 501(c)(3), 501(c)(4), and 501(c)(7) organizations. In most cases, nonprofits are formed under state law, while the IRS independently grants exempt status to qualified organizations.

What Are 501(c)4 Organizations?

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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