Non-Profit C4 Vs. C3

By Grygor Scott

Title 26, Section 501(c) of the Internal Revenue Code recognizes several different types of nonprofit organizations. Nonprofit corporations, trusts and foundations have several advantages over for-profit organizations, including an exemption from paying federal income taxes. Two classes of 501(c) nonprofits, known as “C3” and “C4” organizations, are similar in some respects. However, they have different eligibility requirements, and the IRS places different restrictions on their activities and donations. When deciding whether to structure your nonprofit as a C3 or a C4, these distinctions should be considered.

Mission

To qualify as a nonprofit, an organization must be structured and operated for one of the purposes recognized in Section 501(c). A 501(c)(3) organization must operate exclusively for a charitable purpose. Advocating for improvements in education, defending civil rights and providing assistance to the poor are common charitable purposes. A 501(c)(4) nonprofit must operate exclusively for the promotion of social welfare. Civic associations and volunteer fire departments are common social welfare organizations.

Tax Status

A nonprofit organization seeking exemption from federal income taxes must meet specific IRS requirements. Neither a 501(c)(3) nor a 501(c)(4) can distribute any of its net proceeds to individuals or shareholders. The IRS must officially recognize the organization’s tax-exempt status, either through a determination letter or a ruling. To obtain 501(c)(3) tax-exempt status, an organization must file IRS Form 1023. To apply for 501(c)(4) status, the organization must file IRS Form 1024. To maintain tax-exempt status, all nonprofits operating under these provisions must file annual informational returns with the IRS.

Ready to form a nonprofit? Get Started Now

Contributions

Nonprofits established as C3 entities are often called “charitable” organizations because, in most cases, donors may claim contributions as deductions on their federal income tax returns. In contrast, federal tax law does not allow donations to C4 nonprofits to be deducted on donors' tax returns.

Political Activities

IRS regulations forbid 501(c)(3) nonprofits from engaging in most political activities. Several exceptions exist. For example, a C3 may participate in some nonpartisan political educational activities, such as sponsoring a debate. Unlike C3 organizations, C4 nonprofits may engage in political or legislative activities; however, the organization’s activities cannot be primarily political, and its expenditures on political activities may be subject to federal taxation. Both C3 and C4 nonprofits are prohibited from participating in political activities for or against a particular candidate.

Decision

The two major factors in determining whether to seek recognition as a C3 or C4 are your organization’s anticipated mission and the likely importance of tax-deductible donations to your fundraising success. If your organization’s mission will not involve significant legislative lobbying or political campaigning, 501(c)(3) status is likely more desirable; your donor’s contributions will be tax-deductible in most cases, and this fact may attract more donors and larger contributions. In contrast, if your organization’s mission will likely participate more than incidentally in political activities, 501(c)(4) status may be more appropriate. Keep in mind that your donors will not be able to claim their contributions as tax deductions. Consider whether this will impact your organization's fundraising potential.

Ready to form a nonprofit? Get Started Now
What Is a 501C Non Profit?

References

Resources

Related articles

Requirements to Maintain 501C3 Status

More than 100 501(c)(3) organizations lose their exempt status every year, according to the Nonprofit Risk Management Center. The Internal Revenue Code section 501(c)(3) is a provision in the federal tax code, which allows certain nonprofit organizations, including charities, churches, educational institutions and other organizations that meet the requirements to be exempt from certain taxes. The IRS regulates and regularly reviews exempt organizations to ensure that they are following the regulations and that the organization continues to do the work that led to its exempt status. Failing to follow the guidelines can lead to fines and, in some cases, the loss of 501(c)(3) status.

501(c)(3) Types

Federal taxes are a significant expense for many businesses, but not for exempt non-profits. Non-profit charities that are organized under Internal Revenue Code Section 501(c)(3) are generally tax-exempt, and their donors usually get tax breaks for supporting them. The IRS divides these charities into two categories: public charities and private foundations.

Rules & Regulations for Non Profit Foundations

Nonprofit foundations that meet certain requirements are eligible for special tax treatment by the IRS under Section 501(c)(3) of the Internal Revenue Code. Donors to such organizations enjoy tax benefits as well. Most nonprofit organizations must apply for 510(c)(3) status before taking advantage of its benefits. Under certain circumstances, however, the IRS may revoke a nonprofit foundation's status.

Doing the right thing has never been easier.

Related articles

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

Many nonprofit organizations are created for the purposes of providing some benefit to the public. Depending on the ...

Rules for 501(c)3 Corporations

Many charities pursue 501(c)(3) status because it allows organizations to avoid certain taxes and accept tax-deductible ...

IRS Filing Rules for 501(c)(5)

Section 501(c)(5) of the Internal Revenue Code provides a tax exemption for labor, agricultural and horticultural ...

Differences Between a 501(c) and an L3C

The low-profit limited liability company, known as L3C, is a new organizational form that is now available for ...

Browse by category
Ready to Begin? GET STARTED