For more information: [email protected]
A nonprofit organization organized and operated for charitable purposes may be exempt under Section 501(c)(3) of the Internal Revenue Code while a nonprofit organized and operated for social welfare purposes may be exempt under Section 501(c)(4) of the Code. We are often asked about the difference between the terms “charitable” and “social welfare” and why an organization would elect to be described as one over the other.
It would seem that a charitable purpose and a social welfare purpose would be very similar, and indeed there is substantial overlap in their meanings. Yet there are major differences between 501(c)(3) organizations and 501(c)(4) organizations that cause a social welfare purpose to be more expansively interpreted, allowing within its meaning charitable purposes and other public benefit purposes that might fall a little short of the meaning of charitable. Charity-lite, if you will. The principal rationale for the more discriminative definition of charitable is due to the deductibility of contributions to most 501(c)(3) organizations but (generally) not to 501(c)(4) organizations.
Tax-Exemption
Both 501(c)(3) and 501(c)(4) organizations are tax-exempt from federal income taxes on the income raised or earned related to their exempt purposes. Generally, a startup nonprofit (other than a church) must apply for exemption under 501(c)(3) by filing Form 1023 or Form 1023-EZ with the IRS. In contrast, a nonprofit may either (1) apply for formal IRS recognition of exemption under 501(c)(4) by filing Form 1024 or (2) self-declare itself as exempt under 501(c)(4). In either case, the nonprofit must notify the IRS within 60 days after its establishment of its intent to operate as a 501(c)(4) organization by e-filing Form 8976.
Fundraising and the Deductibility of Contributions
As noted above, most 501(c)(3) organizations are eligible to receive deductible charitable contributions. However, the actual provision of the Code that provides for the deductibility of contributions is found in Section 170(c), which includes:
A corporation, trust, or community chest, fund, or foundation—
(A)
created or organized in the United States or in any possession thereof, or
under the law of the United States, any State, the District of Columbia, or any
possession of the United States;
(B) organized and operated exclusively for religious, charitable, scientific,
literary, or educational purposes, or to foster national or international
amateur sports competition (but only if no part of its activities involve the
provision of athletic facilities or equipment), or for the prevention of
cruelty to children or animals;
(C) no part of the net earnings of which inures to the benefit of any private
shareholder or individual; and
(D) which is not disqualified for tax exemption under section 501(c)(3) by
reason of attempting to influence legislation, and which does not participate
in, or intervene in (including the publishing or distributing of statements),
any political campaign on behalf of (or in opposition to) any candidate for
public office.
The principal differences between Section 170(c)(2) and 501(c)(3) is the requirement in the former that the entity be created or organized in the United States and the absence in the former of a “testing for public safety” purpose. Accordingly, a taxpayer could not take a charitable contribution deduction for a gift to a foreign 501(c)(3) organization or a domestic 501(c)(3) organization whose exempt purpose is testing for public safety.
It’s also important to note that a contribution to a 501(c)(3) organization also described in 170(c)(2) will not be deductible if earmarked for lobbying.
Contributions to 501(c)(4) organizations are generally not deductible with limited exceptions for certain contributions to volunteer fire companies and war veterans organizations. Moreover, a 501(c)(4) organization not covered by such exceptions must disclose, in any fundraising solicitation, that contributions to the organization are not deductible for federal income tax purposes as charitable contributions. The disclosure must be expressed in a conspicuous and easily recognizable format. Certain payment to 501(c)(4) organizations may be deductible as trade or business expenses, if ordinary and necessary in the conduct of the taxpayer’s business.
Lobbying
501(c)(3) public charities may engage in lobbying so long as such activities are insubstantial in relation to their overall activities. Despite such restriction, public charities may engage in generous levels of lobbying without it being considered substantial if they make the 501(h) election. 501(c)(3) private foundations are generally not permitted to engage in lobbying but may fund grantees with general support that the grantees decide to use for lobbying. 501(c)(3) organizations often discount their ability to engage in substantial permissible advocacy-related activities, including issue advocacy, get-out-the-vote drives, and voter registration. We believe advocacy is often a critical tool that boards must consider as a potential way to most effectively and efficiently advance their organization’s mission.
501(c)(4) organizations may engage in unlimited lobbying in furtherance of their social welfare purposes.
Political Campaign Intervention
501(c)(3) organizations are prohibited from engaging in any political campaign intervention activities.
501(c)(4) organizations may engage in political campaign intervention activities so long as such activities do not represent their primary activity. Interpreting the limitation with a high risk tolerance, some 501(c)(4) organizations spend 49% of their resources on electioneering and assert that because 51% of their activities are in furtherance of their exempt social welfare purpose, they are primarily operated for the promotion of social welfare.
Purpose
The exempt purposes under 501(c)(3) are: religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals. We’ve previously written on what constitutes “charitable” under 501(c)(3) here (starting a nonprofit), here (environmental), here (economic development), and here (arts). Regarding the operational test that every 501(c)(3) organization must pass, the regulations provide:
An organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.
The exempt purpose for the most common form of 501(c)(4) is the promotion of social welfare. The regulations provide:
An organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. An organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements.
It’s important to note that a 501(c)(3) organization is expressly prohibited from engaging in more than an insubstantial amount of activities not in furtherance of its exempt purpose. On the other hand, a 501(c)(4) organization may engage in more than an insubstantial amount of activities not in furtherance of its exempt purpose so long as it is primarily engaged in promoting the common good and social welfare of the people of the community. The more generous limit of non-exempt activity permissible to a 501(c)(4) explains why a 501(c)(4) organization may engage in substantial amounts of political campaign intervention activities even though the regulations make clear that such activities do not constitute the promotion of social welfare.
Additional Resources
Comparison of 501(c)(3) and 501(c)(4) permissible activities (Alliance for Justice, Bolder Advocacy)
Published on: April 26, 2017 by Gene Takagi Category:IRS & FEDERAL TAX ISSUES, STARTING A NONPROFIT
Comparison of 501(c)(3)s, 501(c)(4)s, and Political 527 Organizations (Alliance for Justice, Bolder Advocacy)
When Should a 501(c)(3) Consider Creating an Affiliated 501(c)(4)? (Nonprofit Law Blog)