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.

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.

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.

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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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The Purposes of a 501(c)(4)
 

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Pros & Cons of the 501(c)(3)

There are more than 1 million 501(c)(3) organizations, otherwise known as nonprofits, in the United States serving a variety of charitable causes. The process of becoming a nonprofit is time-consuming and should not be entered into lightly. When evaluating whether to become a 501(c)(3), consider what your organization’s goals are and how your business plans to get money. These are two factors that should assist in determining whether your organization should file to become a 501(c)(3).

Can a 501(c)(3) Make a Profit?

A 501(c)(3) organization is a nonprofit that has made a special election with the Internal Revenue Service to be treated as exempt from federal income taxes. The formation and operation of these organizations is governed by both state and federal laws, which require that the business further a specific charitable, scientific, educational or religious purpose. This sets 501(c)(3) organizations apart from for-profit ventures, which are formed for the purpose of generating profits for their owners. Although nonprofits are not prohibited from generating profit from business activities, state and federal laws limit how these profits may be used.

501(c)(3) Auxiliary Restrictions

A 501(c)(3) auxiliary organization is an independent legal entity organized to support a parent organization that is organized as a 501(c)(3), such as a church, university, hospital or other charity. With some exceptions, a 501(c)(3) auxiliary must follow the same restrictions as its parent organization. These restrictions include rules about the organization's purpose, activities and profit distributions.

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