By Jeremy Kritt
With the November 8 midterm elections approaching, and an increasingly polarized political climate, Americans are undoubtedly becoming familiar with the exhortation, “Donate now!”
What many Americans may not understand is that, in most situations, only donations to organizations that qualify for tax-exemption under the Internal Revenue Code’s Section 501(c)(3), which pursue charitable, educational, or other specifically delineated purposes, actually qualify for a tax-deduction.
Section 501(c)(3) organizations cannot participate in political campaigns, so a donation to any political party or candidate will never be tax-deductible. And Section 501(c)(3) organizations can engage in lobbying activities in only limited and specific ways, so it may not always be clear whether a particular advocacy organization is a Section 501(c)(3), to which donations are tax-deductible.
In contrast to Section 501(c)(3) organizations, Section 501(c)(4) organizations are permitted to engage in an unlimited amount of lobbying activities, as long as those activities further the organization’s “social welfare” purposes. As a result, organizations that conduct advocacy and lobbying activities are often Section 501(c)(4) organizations, whose income is tax-exempt but to which donations are not tax-deductible.
Fortunately, large Section 501(c)(4) organizations (those that normally have gross receipts of $100,000 or more) are required to include an express and easily recognizable statement in their fundraising materials that contributions are not tax-deductible. Donors can therefore generally determine on their own whether an organization is a 501(c)(3) or a 501(c)(4). However, they must be careful in doing so, as many 501(c)(3) organizations have an affiliated 501(c)(4) organization, and many organizations that appear to be 501(c)(3)’s are actually 501(c)(4)’s with a 501(c)(3) affiliate.
The intention of this affiliated 501(c)(3)/501(c)(4) structure is not to trick donors or avoid IRS scrutiny, but rather to have a more comprehensive impact, as the 501(c)(4) can engage in an unlimited amount of lobbying, and in a limited amount of political campaign activities, in support of the 501(c)(3)’s mission.
To illustrate why such a structure might be beneficial, imagine a 501(c)(3) committed to preventing cruelty to animals has produced a nonpartisan study showing how the trafficking of exotic animals could be more effectively prevented through federal legislation. While the organization could generally make the results of that study available to government officials and the general public without risking its 501(c)(3) status, it would be severely limited in the actions that it might want to take to promote that legislation.
But the organization’s pursuit of its policy objectives need not be so constrained. It can establish, or collaborate with, a 501(c)(4) organization to undertake the legislative and grassroots lobbying necessary to help ensure that such new laws are enacted. An affiliated 501(c)(4) can be established and operated as a separate and independent legal entity, but can still work with the 501(c)(3) in support of its mission. The 501(c)(4) would need its own charter, bylaws and board of directors, would need to maintain separate bank accounts and books and records, and would need its own independent sources of funding, as the 501(c)(3) can only provide funds to the 501(c)(4) for those projects that further the 501(c)(3)’s mission. However, with appropriate controls in place, the organizations can share resources and strategically work in tandem to maximize their social impact, with the 501(c)(3) engaging in charitable, educational or other similar activities, and the 501(c)(4) engaging in the lobbying activities necessary to optimized the 501(c)(3)’s activities.
Jeremy Kritt is an attorney with The Law Offices of Marc J. Lane, P. C.
If your charity is interested in exploring the possibility of organizing a social-welfare organization – or partnering with one, please feel free to reach out to Marc Lane at 312/372-1040 or mlane@marcjlane.com in confidence.