501(c)(3) or (4): A World of Difference

As a Donor, Know the Distinctions

Do remember Citizens United (a 501(c)4 organization) from the U.S. Supreme Court case on campaign finance Citizens United v. Federal Election Commission? In that case, the Supreme Court decided that the First Amendment prohibits the government from restricting political expenditures by corporations, associations, or labor unions – opening the floodgates for campaign contributions to lobbying groups. Last year, the IRS proposed  new rules to more sharply define “political activity” for 501(c)4 organizations. The deadline for public comments on the new guidelines was last week; they drew a record number of comments – all of them passionate, and most of them in opposition. The debate will be heated with lawmakers and outside groups, so expect it to be in the news for the near future.

IRS Building, DC | Photo: cliff1066™
IRS Building, DC | Photo: cliff1066™

The topic is particularly important in this mid-term election year, with a significant number of Senate, House, and gubernatorial seats being decided on November 4. There will be a lot of fundraising and use of those funds by political groups this year. As a donor, you should know some basic differences between 501(c)3 and 501(c)4 organizations. The distinctions in political activities and tax-deductibility are stark; here is a simple chart showing them. For more information, see IRS Publication 557.

501(c)3 501(c)4
Purpose Religious, charitable, scientific, testing for public safety, literary, or educational purposes, to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals. Can be a public charity, religious congregation, or a private foundation Operated exclusively for the promotion of “social welfare” (primarily engaged in promoting in some way the common good and general welfare of the people of the community)
Political Activity Prohibited from supporting political candidates, and are subject to limits on lobbying (too much of its programs or expenses) May participate in political campaigns and elections, as long as their primary activity is the promotion of “social welfare”
Tax Exempt Qualification Tax Exempt Tax Exempt
Tax Deductibility of Donations Contributions usually are tax deductible (within IRS guidelines) Contributions are usually not tax deductible (except for few exceptions within IRS guidelines)
Disclosure of Donors Required to identify substantial donors (generally donors of $5000 or more) on IRS Form 990, 990-PF or 990-EZ Schedule B, and must include the names and addresses of the donor. Note: these names are usually redacted; by the IRS before distribution, and in the version made publicly available by the nonprofit Not required to disclose their donors publicly

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