Understanding 501c4 Organizations: A Comprehensive Guide

Nonprofit organizations have different classifications depending on their mission, goals, and business model. Some might offer charity work in local communities, others tackle social issues, and others take on international issues, such as cleaning the world's oceans.

Most people know the 501(c)(3) nonprofit structure, but few realize the difference between 501(c)(3) and 501(c)(4) organizations. These nonprofits also have tax-exempt status, but the focus is on services resolving social welfare issues.

Internal Revenue Service Code, section 501(c)(4), issues exemption of social welfare nonprofit organizations from tax responsibilities. These nonprofits typically engage in political organization campaigning and lobbying activities to influence the law and endorse political candidates. 

A 501(c)(4) organization has tax-exempt status, but donors don't receive any tax deduction for donating to the nonprofit. There are several interpretations of social welfare, but the Internal Revenue Service (IRS) has specific qualifiers and definitions for these organizations. 

The IRS states that organizations must operate to enhance the general welfare of communities through activities that deliver social improvement and civic betterment. 501(c)(4) organizations mustn't prioritize private individuals, groups, or foundations.

Here are a few examples of IRS code 501(c)(4) nonprofit organizations.

• Political groups.
• Advocacy groups.
• Interest groups.
• Homeowner associations (HOAs).
• Public accommodations.
• Rotary clubs.
• Disabled veteran programs.

History and Evolution of 501(c)(4) Organizations

The origin of the 501(c)(4) organization traces back to the Revenue Act of 1913, also known as the "Underwood Tariff Act," initiated by Congress. The statute was the precursor to the evolution of section 501(c)(4) and had the goal of patching the gap in legislation and creating a tax exemption for nonprofit organizations that don't qualify as educational, charitable, or religious.

Over the decades, the IRS expanded the 501(c)(4) legislation to include political groups. In the 1950s, the IRS introduced the expansion of categorization of 501(c)(4) organizations as social welfare organizations.

The Internal Revenue Service relaxed the rules surrounding political campaign activity by 501(c)(4) organizations in 1981. The ruling stated that organizations can conduct legal and political activities while remaining tax-exempt under the 501(c)(4) legislation, provided they conduct operations promoting social welfare. 

Characteristics of 501c4 Nonprofit Organizations

As mentioned, 501(c)(3) and 501(c)(4) organizations are tax exempt. 501(c)(3) organizations are typically formed for charitable, religious, and educational reasons. These groups can advocate for a cause promoting social wellness but limit the amount of advocacy, lobbying, or political activities they can engage in. 

Money donations to 501(c)(3) organizations are tax-deductible for donors, and organizations must disclose the donor information to the IRS for contributions totaling $5,000 or more using IRS form 990. 501(c)(4) organizations don't have these limitations and don't have to disclose the names of donors. 501(c)(3) and 501(c)(4) nonprofits can sponsor candidate debates. 

501(c)(3)s must permit candidates to attend functions and allow them to speak on relevant issues. Both 501(c)(3)s and 501(c)(4)s can provide the public with voter guides featuring comparisons of the candidate's views of the nonprofit's issues if the candidate condones or endorses issues relevant to the organization. 

501(c)(3) nonprofits can voice the opinions of elected officials. However, they can't issue personal critiques of these individuals. Some characteristics defining 501(c)(4) organizations include the following.

• The ability to grow and maintain an engaged donor base.
• Political reputation and credibility with public officials, allies, and opponents.
• Influence in steering legislative outcomes through winning policy changes, wielding power, and holding public officials to account.
• The organizational structure can endure long-term challenges to sustainability.
• Well-defined theories of organizational change.
• A compelling and realistic strategic vision.
• Leadership experience and expert members or staff.
• Experience with building momentum in prior campaigns. 

Benefits and Limitations of 501c4 Status

A 501(c)(4) nonprofit organization offers plenty of attractive benefits for businesses that qualify for this section. 

Tax-Exempt Status

This feature is the most attractive benefit of forming a 501(c)(4) organization. Avoiding tax responsibilities helps the organization grow faster, reducing its financial risk.

Engagement in Political Activities

501(c)(4) organizations have legal permission to engage in political activities, with minimal restrictions. These nonprofits can endorse political candidates and engage in marketing and campaign activities without jeopardizing their tax-exempt status and a return to normal structure. 

Unlimited Pledges to Political Causes

501(c)(4) nonprofits have no restrictions on what they can spend or donate to political campaigns and events. This leeway includes paying for necessary expenses, earning pledges, and supporting candidates financially in their run for public office to bolster the nonprofit's mission. 

Protection of Donor Data

While 501(c)(3) organizations must issue donor information on all contributions of $5,000+ and submit donor names for public inspection. As a result, 501(c)(4)s are exempt from making this disclosure, protecting donors' anonymity and privacy and financial contributions.

501(c)(4) Restrictions

Making the move to start a 501(c)(4) nonprofit has plenty of advantages. However, there are specific restrictions and requirements to be aware of before forming this structure. The first is that donations to the organization aren't tax-deductible for donors. 

501(c)(4)s must meet the IRS regulations to qualify as tax-exempt, with the following restrictions. 

• The nonprofit must promote social welfare initiatives for the community's common good. 
• It may not offer preferred advantages to individuals or private shareholders. 
• Tax responsibilities on certain expenses relating to political activities. 
• Requirements to disclose lobbying activities and member expenditures. 

The Application Process for 501c4 Status for a Political Organization or Welfare Organization

The first step in registering a 501(c)(4) nonprofit organization is to file your paperwork in your state. The requirements for acceptance differ by state, and you'll need to reach out to the secretary of state or visit the official website for more information. Or you have the option of contacting an attorney specializing in nonprofit registrations. 

Acquire an Employer Identification Number (EIN)

Next, apply for an Employer Identification Number (EIN) online with the IRS. The system asks you for personal information like your Social Security Number (SSN) and address. You'll also need to provide information on your 501(c)(4), including the address, name, and phone number, and answer basic questions regarding the purpose and mission of your nonprofit.

File Form 8976 – Notice of Intent to Operate Under Section 501(c)(4)

The IRS requires organizations to notify them of their intention to operate as a nonprofit by completing Form 8976 on the official IRS website. You'll include a $50 filing fee with your application. 

File Form 1024-A for Tax-Exempt Status

This form is essential for registering for tax-exempt status under Section 501(c)(4) of the Internal Revenue Code. Applicants must file this form after registering for an account on the pay.gov website. There's a $600 registration fee required to process the application.

File Form 990 for Compliance

The 501(c)(4) organization must annually file Form 990. The IRS offers online training for processing your Form 990. There are several types of 990 forms. The form you file depends on the financial activities conducted by 501(c)(4) nonprofits and their total assets and gross receipts. 

How Long Does It Take the IRS to Approve a 501(c)(4) Filings?

The approval process can take several months to work through the official channels. It's a good idea to plan for delays, especially when filing during peak times of the year. You'll generally wait longer than expected, so consider this in your planning. 

Understanding Financial Management in 501c4s

501(c)(4), nonprofits can conduct various activities to raise funds for the organization and its mission. However, it's vital for them to keep accurate reporting on the organization's use of the funds it raises. Reporting provides insight into the organization's financial health.

The organization's accounting team must compile and review the financial statements to determine their next action. The nonprofit auditor accessed these reports during their review to verify the claims. 

The statement of activities is also known as the organization's "income statement." It reviews the nonprofit's revenue and expenses over time, categorizing funding and expenditures into different categories. There are three categories in the statement of activities. 

Revenue – All income to the organization raised through channels like fees, contributions, gifts, investment income, and funds released from restricted accounts. 

Expenses – Includes the costs of your programs, operating expenses, and fundraising activities. 

Net Assets – This section shows the difference between revenue and expenses. 

501c4 Political Activities and Advocacy

A 501(c)(4) nonprofit is classified as a Social Welfare Organization by the IRS. Most 501(c)(4) nonprofits don't extensively engage in political activities or lobbying. Those who take this approach must do so with the goal of promoting social welfare. 

501(c)(4)s have no restrictions on their lobbying activities for or against upcoming legislation and can oppose and support ballot measures. A 2010 Supreme Court ruling passed the "2010 Citizens United" legislation allowing labor unions and corporations to register as 501(c)(4). This change permitted unrestricted spending by the organization on politics and receipt of donations without disclosing donor status or information. 

Some of the permitted activities of 501(c)(4)s include lobbying, nonpartisan issues, legislative advocacy, and the endorsement of legislation. The organization doesn't have to disclose its donors to the public and can accept donations of all sizes, with unlimited contributions from corporations and super PACs. 

501(c)(4)s can engage in activities relating to nonpartisan election campaigns, but it can't be the nonprofit's primary mission or purpose. It can also endorse political candidates with its members but not the general public. 

The disadvantages of the 501(c)(4) legislation are that the organization cannot take a partisan stance and must remain nonpartisan to maintain its nonprofit status. It cannot support or oppose candidates publicly outside of its membership. 

No contributions from the community are tax-deductible for the donor, whether they are businesses or individuals.  

Challenges Facing 501c4 Organizations

Lack of Financial Support from the Government

Many nonprofit organizations rely on government programs for financial support. The government issues grants or matching schemes to fill shortfalls in nonprofit funding. However, shrinking state and federal budgets mean there is less financial assistance. The allocation and credit of funds by government entities can be hit or miss, with some organizations getting the funding they need while others receive nothing for their organization. 

Budgeting & Income Issues

Growing and maintaining a steady income source is a huge challenge for nonprofits. The seasonal income most nonprofits receive makes it challenging to budget for the financial year. The organization must focus on securing enough income to cover its administration and insurance costs before reallocating leftover funds to projects. 

Pressure to Show Strategic Solutions & Results

In the booming economy, the primary goal of nonprofits was to show the community and the world that they were implementing programs per their mission. However, now that funds are tight, the pressure shifts to showing the achievement of social objectives, which can be challenging to calculate. 

Future of 501c4 Organizations

The future of 501(c)(4) nonprofits aims to create more initiatives on diversity, equality, and inclusion in the workplace. Nonprofits must align their decision-making processes with their priorities and goals. Organizations must test, innovate, and report on their independent findings in association with the law.

One of the biggest challenges all nonprofit models face is the looming potential of a recession in 2024. Recessions are terrible for nonprofit fundraising and lead to shortfalls in finances, increasing financial stress on the organization, management, and employees. 

Understanding 501c4 Organizations – FAQs

Q: What is a member of a nonprofit corporation?

A: Most nonprofits, including 501(c)(4)s, refer to members as donors or supporters. 

Q: How do you formalize a "501(c)(4)" corporation?

A: 501(c)(4) refers to social welfare nonprofits, not charities. This federal tax-exempt organization requires formalization with the IRS to qualify for tax-exempt status, and that process can take several months to finalize. When registering, you'll need information on federal tax provisions and should contact a tax attorney or the IRS for assistance.

Q: Can one individual be a nonprofit organization's sole officer and director?

A: No. Most states, from California to Texas, have a Business Organizations Code that requires all nonprofit organizations to have a minimum of one president, three directors, and one secretary in the organizational structure. The same individual cannot hold the positions of secretary and president simultaneously. Directors and officers must be natural persons to operate internal positions within the organization. 

Q: Who has the authority to investigate nonprofit organizations' activities?

A: The Attorney General has the statutory authority to investigate nonprofits and inspect the records and books of all tax-exempt organizations. The secretary of state does not have this same level of authority. Additionally, the IRS can revoke its tax-exempt status if the nonprofit violates federal tax laws. 

Conclusion

A 501(c)(4) structure offers nonprofits several advantages over the conventional 501(c)(4) organization tax-exempt status. It's the preferred vehicle for any organization involved in political activities or lobbying.

However, there are different rules surrounding what 501(c)(4)s can do, compared to 501(c)(3)s. If you’re unsure of the right nonprofit structure for your organization, reach out to an experienced tax attorney or speak to the state secretary for more information.

If you need more information about 501(c)(4) nonprofits, or how to market your organization and boost donations, reach out to the team at PayBee to discuss your needs. We have the technology and the knowledge to help your nonprofit thrive in any environment.

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