Welcome, potential 501(c)(4) practitioners, and welcome back, 501(c)(4) experts! This article is the first in a series from Impact Fellows to help provide clarity on the differences between 501(c)(3)s and 501(c)(4)s under federal tax rules. This inaugural article provides a high-level overview of key distinctions between 501(c)(3) and 501(c)(4) organizations and legal benefits of operating a 501(c)(4) organization.
501(c)(3) and 501(c)(4) organizations are both recognized as tax-exempt non-profits, but they have three key distinctions in the scope of their permissible activities and their ability to fundraise:
- A 501(c)(4) organization must be operated to promote social welfare, which generally allows for a broader purpose and greater flexibility than a 501(c)(3) charitable organization.
- Although all 501(c)(4) organizations are exempt from paying federal income tax, only 501(c)(3) charitable organizations are eligible to receive tax-deductible donations.
- In addition, 501(c)(4) organizations are not traditionally recipients of grant funding from private foundations.
While these key distinctions may present fundraising difficulties, there are legal benefits for 501(c)(4) organizations compared to 501(c)(3)s that you should consider:
- Ease of Formation. To obtain 501(c)(3) status, a charitable organization must file an Application for Exemption (Form 1023) and obtain a determination letter from the IRS. A 501(c)(4) organization is not required to file a similar Application for Exemption. It may choose to file an (optional) Form 1024 Application for Exemption to receive a formal determination letter, or it may instead simply “self-declare” its exempt status. However, it must file Form 8976 to notify the IRS of its intent to operate as a 501(c)(4) organization within 60 days of formation. While Form 1024 is optional, many 501(c)(4) organizations choose to voluntarily file it in order to receive a formal IRS determination letter and public acknowledgment of their 501(c)(4) tax exempt status.
- Unlimited Lobbying. A 501(c)(3) organization can lobby (“attempt to influence legislation,” in the words of federal tax law), but it is subject to limitations on the amount of its lobbying activities. Those limitations, and the associated administrative burden of tracking expenses and keeping records to ensure compliance, can make it more difficult to lobby through a 501(c)(3) organization. A 501(c)(4) organization is not subject to those limitations or administrative burdens. It may participate in unlimited lobbying activities (so long as those lobbying activities further its social welfare purpose). This freedom to focus on influencing legislation (including ballot initiatives) can allow 501(c)(4) organizations to more effectively advocate for social change.
- Political Campaign Activity. A 501(c)(3) organization is strictly prohibited under federal tax law from participating or intervening in any political campaign on behalf of any candidate for public office. In contrast, a 501(c)(4) organization is permitted to engage in some amount of political campaign activity, so long as such activity does not become its primary purpose. The IRS does not consider political campaign activity to promote social welfare, so it cannot be a 501(c)(4)’s primary focus.
- Donor Anonymity. A 501(c)(3) organization is required to report to the IRS (via Schedule B of its annual Form 990) the names and addresses of significant contributors. Under current law, a 501(c)(4) organization is not required to identify its contributors on its annual Form 990.
These rules combine to effectively allow anonymous donations to 501(c)(4)s, and they create the potential for greater influence on public policy in comparison with 501(c)(3)s.
| 501(c)(4) | 501(c)(3) | |
|---|---|---|
| Obtaining Exemption | May self-declare (Form 1024 optional) | Must file Form 1023; IRS determination letter |
| Lobbying | UNLIMITED | Only if not substantial |
| Political Campaign Activity | Limited/secondary purpose | Absolutely prohibited |
| Donations – Tax Deductible | NO | YES |
| Donors – Anonymous | YES | NO |
Up Next in the Impact Fellows Legal Corner:
What does it mean to lobby? What activities are considered participating or intervening in a political campaign? How can a 501(c)(4) organization determine whether political campaign activity has (impermissibly) become its primary purpose? To what extent can a 501(c)(3) organization financially support or affiliate with a 501(c)(4) organization?
Disclaimer: This information is intended as general information only and should not be construed as legal advice as to any particular matter. You should not consider this information to create an attorney-client relationship. For legal advice, you should contact your own legal counsel.
