In the News: The IRS and 501(c)(3) and 501(c)(4) Organizations: What’s the Big Difference?

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In case you haven’t read the news lately, the IRS has been targeting conservative nonprofits, mostly 501(c)(4) organizations.  What are 501(c)(4)s?  Do you need to know the difference between a 501(c)(3) and a 501(c)(4)?  Do you need a 501(c)(4) in addition to your 501(c)(3)?

A Section 501(c)(3) organization may be a public charity or a private foundation, either of which is entitled to receive tax-deductible contributions.  That’s good news for prospective donors and charitable recipients alike! 

A Section 501(c)(4) organization is known as a “social welfare” organization.  In IRS parlance, it may be operated as an “action organization” – that is, to improve society primarily through changes in the law.  Section 501(c)(4) organizations are not entitled to receive tax-deductible contributions.  Like 501(c)(3)s, however, they are exempt from income taxes on any excess revenues.

Both 501(c)(3)’s and 501(c)(4)’s must file annual IRS Form 990 annual information returns. Compliance with this requirement is now of utmost importance.  Not only may heavy penalties apply for late filings, failure to file Form 990s for three consecutive years will result in automatic revocation of an organization’s tax-exempt status.  Reinstatement is possible, but only after reapplying to the IRS for tax exemption approval. 

Many people involved with worthy causes to improve society are increasingly recognizing the value of Section 501(c)(4) organizations.  In particular, as certain causes are becoming more politicized, a Section 501(c)(3) organization may lack the legal flexibility to promote its cause on multiple fronts including politically oriented activities.  This constraint is due to the absolute prohibition on Section 501(c)(3)’s participation in political campaign activities and its severe limitation on lobbying activities to no more than “insubstantial.” 

On the other hand, a Section 501(c)(4) has much greater ability to engage both in lobbying and, to a certain degree, political campaign activities.  And unlike political campaign organizations, a Section 501(c)4) does not have to make its donors’ names publicly available.  Section 501(c)(4)s also have the distinct advantage of not being required to prospectively apply for tax exempt recognition (although many do, to aid donors and to promote clarity).

To apply these rules, consider any issue with moral overtones.  If your organization spends substantial resources on lobbying efforts to change the law, it would best carry out such activities through a Section 501(c)(4) organization.  That approach should provide ample leeway for the organization’s politically minded work.  By contrast, if your organization is more focused on changing hearts and minds through education, advocacy, and otherwise through changing cultures, then it should use the 501(c)(3) vehicle and reap the significant benefits of tax-deductible contributions.