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What Is A 501(c)(4)?

What is a 501(c)(4)?

When someone talks about nonprofits, the first thing that comes to mind for most people is a 501(c)(3) charity.  That makes sense, given that the majority of nonprofits have this tax-exemption designation.  But charitable nonprofits don’t tell the whole story.  There are also many other types of nonprofits whose work accomplishes important, noncommercial purposes, ranging from trade associations to recreational clubs to social welfare nonprofits.  It’s the latter one that is the focus of our post…that is, the 501(c)(4) social welfare organization.

501(c)(4) Defined

501(c)(4) organizations go by a variety of names, including civic league, public benefit organization, and the title we already mentioned, social welfare nonprofit.  It’s not so much the name that is important, as most 501(c)(4)s wouldn’t use those terms to necessarily describe themselves anyway.  What IS important is to understand what a 501(c)(4) is and what it does.

The IRS says it this way:

If you aren’t organized for profit and will be operated primarily to promote social welfare to benefit the community, you may qualify for exemption under Section 501(c)(4).

So what exactly does “social welfare” mean?  The best way to define social welfare is that it describes an activity that benefits the public in a nonprofit, noncommercial manner, yet that public benefit isn’t charitable in nature.  If it sounds like that could cover an awful lot of ground, you are correct…it does.

In the next section, we’ll take a look at some examples of 501(c)(4) organizations.  You’ll see just how broad this category can stretch.

Examples of 501(c)(4) Nonprofits

When describing the broad nature of possible 501(c)(4) types, it might be challenging to pick up on the common thread.  That’s totally understandable.  Just keep in mind that a 501(c)(4) provides benefit to the public, but it’s not a charitable benefit, nor is it specifically to a charitable class of individuals.  You may even notice an example or two where the same purpose might have been accomplished with a 501(c)(3), just in a different way.

Homeowners Associations

Yes, it’s true.  An HOA usually qualifies to be tax-exempt under 501(c)(4).  While its beneficiary group is limited, the activity is public benefit in nature, as it seeks to better the community it represents.  Its activities aren’t commercial (usually), in that there are no goods or services sold.  Most HOAs collect dues from member homeowners and use those funds to maintain public spaces within the community.

Advocacy Groups

By Advocacy Group, I’m specifically talking about a nonprofit that has a purpose to educate and advocate for certain causes, issues, or points of view.  Even within this category, the range is pretty broad.  Examples include organizations as diverse as the National Rifle Association to the Sierra Club, and even issue combatants, like NARAL Pro-Choice America and the National Right to Life.

What makes these groups similar is the nature of their activity:  inform, educate, influence.  Notice also that none of these are remotely neutral in their topic of advocacy.  I intentionally chose 4 very polarizing examples to illustrate the extreme diversity of possibilities.

Another point to make about Advocacy Groups:  most of them could qualify to be a 501(c)(3) educational organization, but they’re not.  Why?  Reasons vary, but most choose 501(c)(4) status because they aren’t restricted in their ability to spend large sums of money lobbying policymakers for legislative change, unlike charitable groups.  Since donations to 501(c)(4)s aren’t tax-deductible to the donor, the IRS doesn’t restrict lobbying in the same way.  More on donor issues further down in this piece.  Interestingly, many well-known advocacy groups have established charitable foundations to cover strictly 501(c)(3)-qualifying activities.

Political Groups

There’s some potential crossover here with the category above, but they are different.  These groups usually have as a primary mission the election of candidates for public office.  It gets pretty murky pretty quickly, as these groups are often confused for Political Action Committees (PACs), 527s, or an actual candidate’s election committee.  While it can often appear that they’re all doing the same thing, a 501(c)(4) political group is actually prohibited by law from coordinating directly with a candidate’s campaign, even if 100% of their effort is to benefit that candidate.  Most such organizations work toward promoting the electoral prospects of a slate of candidates who represent the particular interest perspective, whether broad (Democrat vs. Republican) or narrow (progressive vs. moderate).

Public Accommodations

These are some of the more interesting 501(c)(4) types.  They are typically very targeted in scope and even geographical reach.  Here’s a bizarre example the IRS uses in some of its publications:  an organization operating an airport that serves the general public in an area with no other airport and that is on land owned by a local government, which supervises the airport’s operation.  Is that specific enough for you?

Other such examples include volunteer fire departments, an annual festival of regional customs and traditions, as well as a free community newspaper that is nonprofit in nature.

There are many other examples and types we could mention, but I think you get the idea.

How To Start a 501(c)(4)

Starting a 501(c)(4) is very similar to starting any other type of nonprofit.  It usually starts with incorporating the entity at the state level, then proceeds to applying to the IRS for tax-exempt status.  The difference, compared with charitable organizations anyway, is in the form required.  501(c)(3) groups use Form 1023, while 501(c)(4) groups use Form 1024 (or Form 1024-A).  Beginning in 2021, the IRS has eliminated the paper version of this form, and only allows filings to be done online through Pay.gov.

Foundation Group works with dozens of 501(c)(4) startups each year.  If you need help getting one up and running, we can help.

Tax Treatment of Contributions

We previewed this conversation earlier above.  Donations to 501(c)(4) nonprofits are NOT tax-deductible to the donor, even though the organization is itself tax-exempt.  Why?  Because the IRS only allows tax deductions for donations to charitable 501(c)(3) nonprofits, not social welfare groups.

Because of this, we’ve counseled with no small number of advocacy clients who insisted on applying for 501(c)(3) status as an educational organization instead of being a 501(c)(4), even though 501(c)(4) was a better fit.  The founders were worried that potential supporters wouldn’t give with getting a tax deduction.

That’s a premise we reject entirely.  It simply isn’t true.  If 501(c)(4) is a better fit…especially when lobbying and campaign activity is involved…choose 501(c)(4).  It makes no sense to tie your hands with the strict limits and prohibitions inherent to a 501(c)(3) when it’s not the best choice.  All across the country, donors give billions to 501(c)(4) groups, even though they get no tax deduction for it.  They do it because they’re what we call “true believers”.  They put their money where their passions are.  We’ve never seen a 501(c)(4) lose out on donations simply because it wasn’t tax-deductible to the donor.  A lack of donors is always because of other reasons.

Conclusion

501(c)(4) nonprofits are a diverse and interesting category of organizations that serve very specific and often very targeted purposes.  Every day, all across the country, these groups are making a difference, as they serve their unique communities.  Chances are, you’ve been involved with one, and didn’t even realize they were a 501(c)(4).  Now you know!

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Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

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