As a 501(c)(3) Tax-Exempt Organization is prohibited from engaging in anything beyond insubstantial political activity. If a non-profit’s mission includes or is to influence legislation, they can still qualify for tax exemption as a 501(c)(4) action organization. Donations to a 501(c)(4) organization are not tax deductible to the donor.
501(c)(4) organizations are generally civic leagues and other corporations operated exclusively for the promotion of “social welfare”, such as civics and civics issues, or local associations of employees with membership limited to a designated company or people in a particular municipality or neighborhood, and with net earnings devoted exclusively to charitable, educational, or recreational purposes.
If your goal is to influence public policy, a 501(c)(4) can be an appealing choice. In addition to unlimited lobbying, a 501(c)(4) is permitted to engage in a limited amount of political activity (so long as it is not the primary purpose of the organization). 501(c)(4) organizations may inform the public on controversial subjects and attempt to influence legislation relevant to its program. Unlike 501(c)(3) organisations however, they may participate in political campaigns and elections, a long as its primary activity is the promotion of social welfare. What that means in practice is that they must spend less than 50 percent of their money on politics. As long as they don’t spend more than 50 percent on politics, the groups can influence political elections which they typically do through advertising. “Action Organizations” are 501(c)(4)s whose activity substantially includes, or exclusively includes direct lobbying or grass roots lobbying related to the advocacy for or against legislation.
501(c)(4)s do receive a tax exemption similar to 501(c)(3)s. Though, the contributions may be subject to gift tax and income spent on political activities is taxable. It is legal for 501(c)(4)s to directly or indirectly support or oppose a candidate for public office so long as this practice is not a substantial portion of the organization’s overall activities.
Contributions to such organizations are usually not deductible as charitable contributions for U.S. federal income tax on the behalf of the donor. As a result, 501(c)(4)s are not required to disclose their donors publicly. The lack of disclosure has led to extensive use of the 501(c)(4) provisions for organizations that are actively involved in lobbying, and has become controversial, criticized for the level of spending on political TV ads by these organizations exceeding that from Super PACs.
In order to become a 501(c)(4) organization, the following steps need to be taken:
– Step 1: Create the organization based on state law as a corporation, trust, or unincorporated association.
– Step 2: Obtain an Employer Identification Number (EIN)
– Step 3: Prepare and File Application for Exemption
– Step 4: File Form 990
This entire process usually takes between 90 and 180 days.