The Internal Revenue Service (IRS) defines a 501(c)(4) nonprofit as a tax-exempt organization that is established for social welfare purposes or local associations of employees. The term “501(c)(4)” refers to the section of the Internal Revenue Code where these organizations are granted tax-exempt status.
What do 501(c)4 nonprofits focus on?
501(c)(4) organizations engage in promoting social welfare causes, including activities related to community improvement, civic engagement, advocacy for specific causes, and the promotion of the common good. A 501(c)(4) organization can also comprise local employees of a particular employer. These employees' net earnings will be devoted solely to charitable, educational, or recreational purposes. However, a 501(c)(4) nonprofit will be engaged in a social welfare cause.
A 501(c)(4) nonprofit cannot be focused on one single group of people. It must benefit the community at large. An example of a social welfare organization that meets the requirement for the 501(c)(4) tax exemption would be a community association whose purpose is to promote and preserve a community's historical areas.
Examples of Activities 501(c)(4) nonprofits organize
The association could plan community days of service to clean and repair historical areas, raise money for the area's preservation, or represent the association's desires before the local legislature and administrative agencies to protect the historical areas. However, the association could not be centered on preserving one historical place or building.
What are the differences between a 501(c)(4) and a 501(c)(3)?
One of the biggest differences between a 501(c)(4) and a 501(c)(3) is the designated purpose of the organization.
A 501(c)(4) must have as its purpose the promotion of social welfare or the support of a local association of employees. However, the range of allowed purposes of a 501(c)(3) is more broad, and includes religious, educational, scientific, or literary endeavors. The 501(c)(3) tax exemption can apply to a wider array of organizations compared to the 501(c)(4) tax exemption.
Interactions with the U.S. Political Process
There is a notable difference between the two sections in terms of the interactions that organizations can have with the political process in the United States. Generally, a 501(c)(3) organization is restricted from engaging in certain political activities, such as lobbying political parties or participants, financially supporting a political campaign, endorsing a political candidate, or actively campaigning for or against a political candidate. However, a 501(c)(3) organization is allowed to provide non-biased education on public policy.
On the other hand, a 501(c)(4) organization has more leeway to take part in the political process. A 501(c)(4) organization can engage in lobbying efforts related to its social mission, financially support political campaigns, endorse political candidates, actively campaign for or against political candidates, sponsor debates, and provide political education. It is important to note that for a 501(c)(4) organization to qualify for tax exemption, these political activities cannot be its primary purpose or main activity. These actions are only permissible if they further the social mission of the organization.
A 501(c)(4) and a 501(c)(3) also differ in the tax implications for donors. Donors who contribute funds to a 501(c)(3) nonprofit can deduct those contributions from their annual tax returns. But, those contributions are not generally tax deductible for donors who contribute to a 501(c)(4). There are, however, fewer restrictions on who can donate to a 501(c)(4) compared to a 501(c)(3).
What are the benefits and capabilities of a 501(c)(4)?
A 501(c)(4) organization offers several benefits and capabilities, making it an attractive option for certain types of nonprofits. Some key benefits associated with 501(c)(4) status include a focus on social welfare advocacy, political engagement, flexibility in funding, and benefits for donors.
Promoting Social Welfare Causes
501(c)(4) organizations are specifically designed to promote social welfare causes. They have the flexibility to engage in a wide range of activities to improve communities' well-being and advocate for social change. A 501(c)(4) can also promote the welfare of local groups of employees. As the group of employees come together and receive donations, the employees can then offer those funds to charitable, educational, or recreational undertakings.
Engagement in Political Campaigns
Unlike 501(c)(3) nonprofits, which have limitations on political activities, 501(c)(4) organizations can actively engage in political campaigns, endorse candidates and lobby for legislation. They have greater freedom to participate in political advocacy and contribute to shaping public policies. Because a 501(c)(4) is dedicated to a specific social welfare mission, it can promote and advocate for that mission in the political domain.
501(c)(4) organizations have more flexibility in generating revenue compared to 501(c)(3) organizations. 501(c)(4) organizations can engage in revenue-generating activities such as fundraising events, selling merchandise, or providing services or products related to their social welfare purposes. This flexibility can provide additional financial sustainability for the organization.
Contributions made to a 501(c)(4) are generally not tax-deductible for individual donors. However, this lack of tax deductibility means there are no limitations on the sources or amounts of donations. 501(c)(4) organizations can accept donations from individuals, corporations, labor unions, and other entities without the same restrictions imposed on 501(c)(3) organizations.
501(c)(4) organizations generally have more privacy protections compared to 501(c)(3) organizations. While they still need to file an annual information return with the IRS, the level of public disclosure required for 501(c)(4) organizations are less stringent, providing greater privacy for donors and internal operations.
If an organization has these characteristics and seeks these benefits, applying for the 501(c)(4) tax-exempt status could be advantageous. Further on, this article will describe the process of applying for the 501(c)(4) tax-exempt status.
What are the tax implications of a 501(c)(4)?
As a 501(c)(4) nonprofit, the organization itself is exempt from paying federal income taxes. Some states may require the organization to pay various state taxes, including income, property, or sales and use taxes. An organization should review the specific requirements of its jurisdiction before applying for 501(c)(4) tax-exempt status. A 501(c)(4) is generally not exempt from paying employment taxes when applicable.
Unlike a 501(c)(3) nonprofit, where donations or contributions are tax deductible for the donor, donations made to 501(c)(4) nonprofits are not tax deductible for the donor. This may negatively affect the organization because it may disincentive donors from contributing to the organization's cause.
Potential Taxable Income
501(c)(4) nonprofits are permitted to engage in political activities such as campaigning, fundraising, contributing to campaigns, and endorsing candidates. Income generated from such political activities is potentially taxable because the IRS does not view those actions as substantially related to a 501(c)(4) organization's social welfare purpose. It is vital for the organization to keep accurate records and accountings of income made from political activities to report any taxable income if applicable.
Potential Unrelated Business Income Tax
A 501(c)(4) organization may be subject to the Unrelated Business Income Tax (UBIT) if it generates income from unrelated business activities which are not substantially related to the organization's tax-exempt purpose. These activities can include sponsorships and advertising, licensing fees from the organization's intellectual property, and rental income. The activities which are not substantially related to the organization's purpose are subject to the UBIT. The organization must file a Form 990-T to report and pay any applicable taxes if the 501(c)(4) grosses $1,000 or more from unrelated business activities.
Operating as a 501(c)(4) nonprofit has considerable tax benefits and consequences, which must be considered and understood before applying for this tax-exempt status.
Should your nonprofit start a 501(c)(4)?
Deciding whether your nonprofit should be a 501(c)(4) organization requires careful consideration of several factors. This section describes some points to consider when making this decision.
Are you promoting social welfare causes?
501(c)(4) organizations are specifically designed to promote social welfare causes. If your nonprofit's primary activities involve advocacy, civic engagement, community improvement, or other social welfare initiatives, a 501(c)(4) status might be appropriate.
Do you intend to actively participate in political campaigns?
If your organization intends to actively participate in political campaigns, endorse candidates, or engage in lobbying activities as a core part of its mission, a 501(c)(4) status may be more suitable. Keep in mind that 501(c)(4) organizations have fewer restrictions on political activities compared to 501(c)(3) organizations.
Are you looking for tax deductions?
Unlike donations to 501(c)(3) organizations, contributions to 501(c)(4) organizations are generally not tax-deductible for individual donors. Consider whether this potential limitation on fundraising and donor incentives aligns with your nonprofit's financial needs and objectives. Although donations are not tax deductible for the donor, a 501(c)(4) is not restricted on how much it can receive in donations or who can donate.
Ultimately, the decision to pursue 501(c)(4) status for your nonprofit should align with your mission, objectives, and the nature of your activities.
What must be done to obtain and maintain the 501(c)(4) tax-exemption status?
To obtain and maintain the 501(c)(4) status, nonprofit organizations must adhere to certain guidelines and requirements set by the IRS. This section details the general process that must be followed to obtain and maintain the tax-exempt status.
- The primary purpose of a 501(c)(4) organization must be promoting social welfare. This can include activities related to community improvement, civic engagement, and advocacy. Political activities and lobbying are allowed but should not be the organization's primary focus. If your organization's primary purpose is not to promote a social welfare cause, a 501(c)(4) is not the status to file under.
- A 501(c)(4) must be organized as a nonprofit corporation, association, or community chest. It should not be organized for profit or operated for the benefit of private individuals. The organization should file an application with the IRS to acquire an Employer Identification Number (EIN).
- To obtain 501(c)(4) status, the organization must electronically file Form 8976, Notice of Intent to Operate Under Section 501(c)(4), with the IRS and pay the $50 registration fee within sixty (60) days of formation. Form 8976 only needs to be submitted once but is not determinative if the IRS will recognize the organization as tax-exempt. The organization may file Form 1024-A, Application for Recognition of Exemption Under Section 501(c)(4) of the Internal Revenue Code, with the IRS, which requests recognition of the organization's tax-exempt status.
- Please note submitting Form 1024-A does not relieve the organization from submitting Form 8976 and paying the registration fee.
- Once the organization begins operating under 501(c)(4) status, the organization must meet certain reporting and compliance obligations. This includes filing an annual information return (Form 990, 990-EZ, or 990-N) to provide financial information to the IRS and the public.
It is imperative for an organization to file the applicable annual information form. If the form is not filed yearly for three consecutive years, the IRS will automatically revoke the organization's tax-exempt status. The organization is then liable for the taxes incurred from its activities, and a penalty will accrue until the missing forms are filed. If this type of revocation occurs, the IRS has instituted ways in which the organization can reinstate its tax-exempt status.
- Although 501(c)(4) organizations can engage in political activities and lobbying efforts, the organization's primary activities should still focus on promoting social welfare. There are rules regarding the percentage of resources and time that can be devoted to political activities. The IRS provides resources like Publication 557, which contains informative sections such as "Dues Used for Lobbying and Political Activities" and “Political Organization Income Tax Return.” These sections provide guidance on the requirement regarding political activities for 501(c)(4) organizations.
A 501(c)(4) nonprofit is an organization whose purpose is to promote social welfare or to support a local association of employees. There are distinct differences in permissible activities and tax consequences between a 501(c)(4) and a 501(c)(3), which should be thoughtfully considered when deciding how to establish your own tax-exempt nonprofit.
If you have questions about starting a 501(c)(4) nonprofit, contact our experienced nonprofit lawyers today for a free consultation.