501(c)(4) Organizations

Background

A 501(c)(4) organization is a social welfare organization, such as a civic organization or a neighborhood association (homeowner association). An organization is considered by the IRS to be operated exclusively for the promotion of social welfare if it is primarily engaged in promoting the common good and general welfare of the people of the community. Net earnings must be exclusively used for charitable, educational, or recreational purposes.

According to The Washington Post, 501(c)(4) organizations:

... are allowed to participate in politics, so long as politics do not become their primary focus. What that means in practice is that they must spend less than 50 percent of their money on politics. So long as they don't run afoul of that threshold, the groups can influence elections, which they typically do through advertising.

Allowed Activities

501(c)(4)s are similar to 501(c)(5)s and 501(c)(6)s in that the organizations may inform the public on controversial subjects and attempt to influence legislation relevant to its program and, unlike 501(c)(3) organizations, they may also participate in political campaigns and elections, as long as their primary activity is the promotion of social welfare and related to the organization's purpose.

The income tax exemption for 501(c)(4) organizations applies to most of their operations, but income spent on political activities - generally the advocacy of a particular candidate in an election - is taxable. An "action" organization generally qualifies as a 501(c)(4) organization. An "action" organization is one whose activities substantially include, or are exclusively, direct or grassroots lobbying related to advocacy for or against legislation or proposing, supporting, or opposing legislation that is related to its purpose.

A 501(c)(4) organization may directly or indirectly support or oppose a candidate for public office as long as such activities are not a substantial amount of its activities.

A 501(c)(4) organization that lobbies must register with the Clerk of the House if it lobbies members of the House or their staff. Likewise, a 501(c)(4) organization must register with the Secretary of the Senate if it lobbies members of the Senate or their staff. In addition, the 501(c)(4) organization must either inform its members the amount it spends on lobbying or pay a proxy tax to the Internal Revenue Service (IRS). Lobbying expenses and political expenses are not deductible as business expenses.

Electioneering Communications

The use of 501(c)(4), 501(c)(5), and 501(c)(6) organizations has been affected by the 2007 case FEC v. Wisconsin Right to Life, Inc., in which the Supreme Court struck down the part of the Bipartisan Campaign Reform Act of 2002 ("McCain-Feingold Act") that prohibited 501(c)(4)s, 501(c)(5)s, and 501(c)(6)s from broadcasting electioneering communications. The McCain-Feingold Act defined an electioneering communication as a communication that mentions a candidate's name 60 days before a primary or 30 days before a general election.

Contributions

Contributions to 501(c)(4) organizations are not tax-deductible as charitable donations unless the organization is either a volunteer fire department or a veterans organization. Dues or contributions to 501(c)(4) organizations may be deductible as a business expense under IRC 162, although amounts paid for intervention or participation in any political campaign, direct lobbying, grass roots lobbying, and contact with certain federal officials are not deductible. If a 501(c)(4) engages in a substantial number of these activities, then only the amount of dues or contributions that can be attributed to other activities may be deductible as a business expense.

The organization must provide a notice to its members containing a reasonable estimate of the amount related to lobbying and political campaign expenditures, or else it is subject to a proxy tax on its lobbying and political campaign expenditures. It must also state that contributions to the organization are not deductible as charitable contributions during fundraising.

A 501(c)(4) organization is not required to disclose their donors publicly, with the exception of organizations that make independent expenditures as of 2018. The former complete lack of disclosure led to extensive use of the 501(c)(4) provisions for organizations that are actively involved in lobbying, and has become controversial. Criticized as "dark money," spending from these organizations on political advertisements has exceeded spending from super Political Action Committees (super PACs). Spending by organizations that do not disclose their donors increased from less than $5.2 million in 2006 to well over $300 million during the 2012 election season.

Every organization, including a 501(c)(4) organization, that expressly advocates for the election or defeat of a particular political candidate and spends more than $250 during a calendar year must disclose the name of each person who contributed more than $200 during the calendar year to the Federal Election Commission. The Federal Election Commission is required to enforce this provision based on a federal court decision in 2018.

History

The origins of 501(c)(4) organizations date back to the Revenue Act of 1913, which created a new group of tax-exempt organizations dedicated to social welfare in a precursor to what is now Internal Revenue Code Section 501(c)(4).

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) introduced a new requirement on 501(c)(4) organizations. Within 60 days of the organization's formation, a 501(c)(4) organization is required to file IRS Form 8976 with the Internal Revenue Service as notification that it is operating as a section 501(c)(4) organization. The Internal Revenue Service will acknowledge receipt of the notification, but the acknowledgment is not a determination that the organization qualifies for section 501(c)(4) tax-exempt status. A 501(c)(4) organization is not required to send the notification if the organization was formed on or before 8 July 2016, and it either applied for a determination letter using IRS Form 1024 or filed a IRS Form 990 between 19 December 2015 and 8 July 2016.

As of January 2018, the application for recognition of exemption as a 501(c)(4) organization is a new form, IRS Form 1024-A, rather than Form 1024.

Between 2010 and 2017 the number of 501(c)(4) organizations dropped from almost 140,000 to less than 82,000. In 2017 revocations of 501(c)(4) groups comprised 58% which usually is only 15% of the total nonprofits which have their tax status revoked by the IRS for their failure to file the IRS Form 990.

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