501(C)(4) CONTRIBUTIONS ARE NOT TAX DEDUCTIBLE

By Stephen Fishman, J.D.

One big difference between 501(c)(3) public charities and 501(c)(4) social welfare organizations is that contributions to 501(c)(3)s can be tax deductible, while contributions to 501(c)(4)s are never deductible. However, since both are nonprofits, they need not pay income tax on their income unless they are engaged in some type of business activity unrelated to their mission.

Because donations to them are never tax deductible, Section 501(c)(4) organizations are not required to get IRS approval of their tax-exempt status. However, many seek IRS approval anyway. It helps to show that they are a legitimate organization. Indeed, the IRS says that the number of 501(c)(4)s seeking IRS approval has doubled in recent years.

POLITICAL ACTIVISM

Because contributions to Section 501(c)(3) organizations are deductible, they may only play a limited nonpartisan role in elections. They are flatly prohibited from intervening in political campaigns in any manner whatsoever, whether by endorsing or opposing candidates for public office, mobilizing supporters to help elect or defeat candidates, or giving money to political campaigns or political parties. This prohibition applies to all political campaigns for elective office, including those at the federal, state, and local level, and even includes elections in foreign countries. A public charity that violates these rules can lose its tax exemption. (For more information, see Limits on Political Campaigning for 501(c)(3) Nonprofits.)

In contrast, because contributions to a social welfare organization are not tax-deductible, a social welfare organization may engage in unlimited lobbying as long as it advances its tax-exempt social welfare purpose. For example, a social welfare organization created to help improve public health could spend its money lobbying Congress to provide more funding for public health. But it could not lobby Congress to increase the budget for space exploration.

Social welfare organizations can also engage in extensive political campaign activity. As a result of the United States Supreme Court’s controversial decision in Citizens United v. FEC, 501(c)(4) nonprofits can spend their money (both voluntary contributions and general treasury funds) to support or oppose candidates for the U.S. House, U.S. Senate, and President. However, there are still some important limitations on 501(c)(4) political activities:

  • they can’t give money directly to candidates
  • the political campaign activity must be undertaken to advance the organization’s social welfare purpose–for example, an organization formed to advance public health could support political candidates who agree with its positions, and
  • political activity may not be a social welfare organization’s primary activity—no more than half of its activities should involve such political work.

In addition, social welfare organizations that spend money on political activity can become subject to a special tax on the lesser of the organization’s net investment income or the total amount spent on political activity. The applicable amount is taxed at the corporate tax rate—21%. Organizations that don’t have investment income need not worry about this tax. (See IRC Sec. 527.)

Citation

Fishman, S. (2013, May 31). What is a 501(c)(4) Social Welfare Organizations?

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