501c4: Everything You Need to Know
A 501c4 is a tax code identifier used by the Internal Revenue Service (IRS) for specific types of non-profit organizations within the U.S. Recently8 min read
What is a 501c4?
A 501c4 is a tax code identifier used by the Internal Revenue Service (IRS) for specific types of non-profit organizations within the U.S. Recently, there’s been an increase in interest of the code after certain conservative bodies felt they were met with resistance from the government entity.
The IRS uses 501c qualifiers for different types of groups whose purpose is for social welfare causes, and within this designation, there are multiple categories that are further distinguished by a specific number, hence the addition of ‘4’. Each subgroup is required to meet certain requirements to qualify for a 501c identifier, but there are also different rules that they must abide by within their distinct group.
According to critics, one of the biggest issues associated with 501c4 is the lax rules that allow political organizations to use non-profit status to their advantage. The IRS claims that they offer unbiased approach when denoting non-profit status and only look at the facts.
How Does 501c4 Connect With Electoral Politics?
One of the biggest confusions for many individuals is the crossover of electoral politics into social welfare advocacy. The rules set forth by the IRS permit non-profit groups to be involved in politics as long as it isn’t their main area of focus.
To qualify and maintain 501c4 status, an organization can’t spend more than half of their funds on political-related things. The technical majority of their spending (50.1 percent) needs to be focused on social welfare projects within their chosen locations. However, these rules don’t prevent them from attempting to impact elections with digital, print, or televised advertisements.
What Are Some Examples of 501c4s?
One of the most recognizable 501c4 organizations is Crossroads GPS, a right-leaning organization started by Karl Rove. Another prominent example is Organizing for Action, a left-leaning group formed from President Obama’s 2012 presidential campaign. In many circumstances, these non-profit entities are affiliates of a super PAC as is the case with Rove’s Crossroads GPS, which is connected to American Crossroads.
American for Prosperity and Organizing for Action, two other well-known 501c4 groups, keep their focus mostly on legislature bodies by lobbying for specific bills to get them passed by Congress. The National Rifle Association and Planned Parenthood are also non-profit organizations with 501c4 status.
How Much Are 501c4 Organizations Spending?
501c4 organizations are spending hundreds of millions a year with the biggest amounts occurring during major election years. The Center for Responsive Politics revealed that the 2012 campaign season saw $35 million spent by liberal non-profit groups and $263 million by conservative bodies.
The general public typically thinks of super PACs when it comes to any mention of a huge amount of political money spent, but in fact, the Center for Responsive Politics released a study in 2010 revealing that 504c4 groups spend substantially more than super PACs.
What’s the Difference Between Super PACS & 501c4s?
The difference between super PACs and 501c4 organizations is donor guidelines set out by the IRS. Super PACS are required to document and release the names of their donors, but non-profits that register as a 501c4 are allowed to keep that information private. This level of secrecy is what makes the 501c4s a popular choice for donors that want to try and influence elections at various levels of government.
The IRS places specific restrictions on 501c4 organizations including:
- An individual member isn’t allowed to finically benefit from the group;
- The group may not work directly with political campaigns;
- Funds used for political involvement are taxable.
It’s important to point out that while the organization can’t work on behalf of a politician’s campaign, they are still allowed to complete actions, like broadcasted advertisements, that could benefit a candidate.
One of the main requirements of a 501c4 association deals with lobbying. The IRS allows such organizations to lobby for its desired legislation as long as it pertains to their social welfare causes. However, if lobbying occurs, they may have to divulge the amount of funds used for such processes, especially when the money is directly tied to membership fees. In some instances, the IRS may tax some or the entire amount spent.
501c4 Common activities
As mentioned above, qualifying for any of the 501c statuses requires that an organization must meet or strive to meet the social welfare needs of a community without the desire to make a profit. When the IRS is determining the status of a 501c4, they focus on the aspect of social welfare and keys in on whether or not their services could potentially benefit the public as a whole and not a small or private group of individuals.
501c4 Donations & Disclosure Requirements
When a person or entity makes a donation to a 501c4, the amount isn’t eligible for a tax-deduction. These types of organizations aren’t required to release complete donor information to the public like name and address, but they do have to release specific requirements.
There are two forms that the IRS requires from 501c4: Form 990 and Form 1024. While Form 1024 is the application for tax exemption, Form 990 is concerned with the amount of money made by the organization over the past year, but names and addresses of individual donor are only required with donations over $5,000 on the Schedule B portion of the form. Even then, the IRS doesn’t release this to the public with the exceptions of 527 groups or private foundations that made donations.
While the federal entity doesn’t release the information, many states do, and the IRS suggestion that 501c4 avoid sending such information to state governments sparked a lawsuit in December 2014 from the State of California. The legal dispute requested that the IRS provide states with Schedule B documents from each 501c4 group within their state border. Since then, at least five states have made it a law that non-profit organizations must file the form with the state as well or risk losing their tax status.
501c4 Political & Legislative Activities
According to the IRS, any process or activity that affects the electoral process is deemed a political activity. While the institution doesn’t consider political activities to fall under the category of social welfare, the 50 percent rule placed on 501c4 groups allow them to participate in such ventures unlike their 501c3 counterparts who face tougher restrictions.
Technically, 501c4 organizations can take part in political activities including funding projects to support or oppose a candidate as long as they’re not directly involved with their campaign. The IRS also allows the groups to lobby for their causes because the institute believes that such practices can potentially benefit the social welfare of the public.
501c4 "Non-Profit" Status
Most 501c4 groups are referred to as “non-profit” entities, but non-profits don’t automatically receive 501c4 benefits. To achieve such a status, the entity must first apply for it with their state in which they reside and be given approval as a non-profit. 501c4 recognition, on the other hand, is provided by the IRS at the federal level and isn’t directly tied to the state’s operation, so it must be achieved separately.
Non-profit organizations typically qualify for one of two corporate tax statuses: 501c3 or 501c4. 501c3 requires more restrictions on the use of funds, but the IRS legally allows money to be transferred between the two types of non-profit organizations. However, the funds are held to the restrictions of the initial tax code of which they were obtained.
Organizations like the American Civil Liberties Union (ACLU) is a prominent example of such a group as it registered as 501c4 to obtain lobbying privileges, but it’s educational offshoot – the ACLU Foundation – is classified as a 501c3.
Overview of Exempt Non-Profits
For a business or corporate entity to be labeled a “non-profit”, its main focus must other than earning money for its leaders or members. This status doesn’t mean that a non-profit can’t raise funds, but such money can’t be used for things like bonuses or unreasonably high salaries.
By meeting the IRS requirements, some non-profit organizations get to benefit from the elimination of federal taxes. This includes bypassing federal income taxes as well some state-specific income, property, and sales tax. Every state has their own unique laws pertaining to such tax code statuses, but organizations receiving a federal non-profit status can expect reduction in their overall tax liability.
Different Types of Organizations That Qualify for 501c Statuses
The IRS allows a variety of different types of organizations to obtain 501c, non-profit status. From religious organizations to private foundations, there’s a multitude of groups that qualify for either a 501c3 or a 501c4 ranking.
The main differentiator between 501c3 organizations and 501c4 groups are the level of charitable donations and activities. The most common types of 501c3 groups are churches and museums while organizations like homeowner’s associations would fall under the 501c4 classification.
Lobbying Under a 501c4 Status
While 501c3 organizations are limited to minor lobbying tasks that spend less than 10 percent of their budget, 501c4 can freely act on their lobbying desires. Such activities typically involve pushing for the repeal or passage of laws as well as increasing public awareness and support for such causes.
How Does the Public Know How 501(c)(4) Groups Spend Their Money?
Form 990, which all 501c4 groups are required to submit to the IRS, provides some insight into where their money is spent including outside companies that they hire. However, the explanation for such expenses only requires a simple, vague outline that limits the knowledge of both the IRS and the public.
When it comes to political activity, it’s slightly easier to track. Such circumstances require 501c4 groups to document and report all money spent on projects to increase or decrease support for a political candidate must be reported to another government entity called the Federal Election Commission.
Does the IRS Have a Role In Enforcing Campaign Finance Laws?
The IRS’ responsibility is to ensure that organizations qualify for the 501c tax status, so they have a limited role in ensuring that campaign finance laws are followed. Since the tax codes cover a variety of non-profit organizations, there’s actually only a small portion of groups with political affiliation.
After the judgment in the 2013 Citizens United case, which widened the availability of tax code guidelines, there was an influx of requests for 501c4 status from conservative groups. The resulting IRS decisions to refuse some such statuses was an effort to ensure that political-focused groups and not an desire to enforce campaign finance laws or restrict certain viewpoints from tax exemption. It most likely only made headlines because of the number of inquiries coming into the institution and the political climate of the time.
How Could the 501c4 Loophole Be Closed?
Many different outlets have made suggestions as to preventing political-focused groups from taking advantage of the donor privacy provided by the 501c4 tax code. The terminology of the current code is why it’s so easy for such organizations to use the loophole because it allows the IRS to decide what processes qualify as political.
While most 501c4 organizations stand by the tax attorney suggestions of keeping 50.1 percent of their funds focused on non-political projects, there isn’t a law that specifies such a number. One of the most obvious decisions would be to prevent non-profits from political activity or at least to create a defining line for the amount of political involvement allowed.
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