Quite often, we are asked how a 501(c)(4), a 501(c)(5), or a 501(c)(6) organization differs from a public charity under 501(c)(3), since those types of nonprofit organizations are some of the more common types that are not 501(c)(3)s. The following provides some general information on how these organizations differ.
Charitable Contributions
501(c)(3) and 527 political organizations must disclose certain donor information on Schedule B of Form 990. 501(c)(3) private foundations and 527 political organizations must also disclose this information to the public. 501(c)(3) public charities do not disclose this donor information to the public. 527 political organizations also have a separate disclosure requirement to the IRS on Form 8872. Since 2018, other 501c organizations no longer disclose this information.
Advocacy and Social Welfare Organizations
Advocacy and social welfare organizations are defined in code section 501(c)(4).
These organizations are allowed to engage in “unlimited lobbying” (defined later in this article) as long as the lobbying promotes the organization’s mission. 501(c)(4) organizations may also engage in political campaign efforts and lobbying as long as these efforts do not represent their primary activity.
Within 60 days of formation, every 501(c)(4) organization must file Form 8976, Notice of Intent to Operate Under Section 501(c)(4) in order to notify the IRS. Please note that Form 8976 is not a determination from the IRS.
If you desire to receive an official IRS determination of 501(c)(4) status, you may file Form 1024-A, Application for Recognition of Exemption Under Section 501(c)(4) of the Internal Revenue Code. If your exempt status was previously revoked for a failure to file Form 990 or Form 8976 for three consecutive years, you must then file Form 1024-A.
Other requirements/provisions under 501(c)(4):
A 501(c)(4) organization must be established primarily to promote social welfare.
Contributions to 501(c)(4) organizations are generally not deductible as charitable contributions, but may be deductible as trade or business expenses
Excess benefits to certain persons may trigger an excise tax
Labor Unions or Agricultural Organizations
Labor unions and agricultural organizations are defined in code section 501(c)(5).
If you desire to receive an official IRS determination of 501(c)(5) status, you may file Form 1024, Application for Recognition of Exemption Under Section 501(a). There is generally no deadline for submitting Form 1024 as it is not required.
As is the case with 501(c)(4) organizations, 501(c)(5) organizations are allowed to engage in political campaign efforts and lobbying as long as these efforts do not represent their primary activity.
Business Leagues
Business leagues include chambers of commerce and real estate boards. These organizations are defined in code section 501(c)(6).
If you desire to receive an official IRS determination of 501(c)(6) status, you may file Form 1024, Application for Recognition of Exemption Under Section 501(a). There is generally no deadline for submitting Form 1024 as it is not required.
As is the case with 501(c)(4) and 501(c)(5) organizations, 501(c)(6) organizations are allowed to engage in political campaign efforts and lobbying as long as these efforts do not represent their primary activity.
Intervention in Political Campaigns
As stated on the IRS website, the promotion of social welfare does not include direct or indirect participation in political campaigns on behalf of or in opposition to any candidate for public office (local, state, or federal), hereinafter referred to as “political campaign efforts”. 501(c)(3) organizations are strictly prohibited from engaging in any political campaign efforts. 501(c)(4), 501(c)(5), and 501(c)(6) organizations may engage in some political campaign efforts as long as that is not its primary activity. Such activities may be subject to IRC section 527(f) tax (see below).
Be careful to not confuse lobbying activities with political campaign efforts.
Direct Lobbying
Direct lobbying includes attempts to influence new or existing legislation by direct communication of a member of a legislative body who has a say in such new or existing legislation. Direct lobbying must have all of the following elements:
Communication
With a legislator (or a legislator’s staff)
That expresses a view about specific legislation
When it comes to matters that are determined at the voting booth and not in legislative chambers, efforts aimed at convincing the public to support or oppose a particular ballot initiative, referendum, proposal, or bond measure are also considered direct lobbying.
Amounts paid for direct legislative lobbying efforts are not deductible as a business expense at the federal, state, and local levels. Until the Tax Cuts and Jobs Act of 2017, amounts paid for direct lobbying efforts at the local level could be deducted as a business expense. The 2017 act removed that exclusion.
Proxy Tax
If your 501(c)(4), 501(c)(5), or 501(c)(6) organization engages in grassroots or direct lobbying efforts at the federal and/or state level, or if the organization engages in political campaign efforts, you must do one of two things:
Notify your members that a portion of their dues are not deductible as a business expense. You often see this small notification printed by 501(c)(6) organizations along with the annual dues notices: “…95.3% of your member dues may be deducted in accordance with Code Section 6033(3) and 162(e).”
Pay a proxy tax equal to the tax on the amount of lobbying expenses that were included in the members’ dues where a notification of nondeductible dues was not issued to the members. Currently, this tax is assessed at the corporate rate of 21%.
An annual Form 990-T is filed in order to report this taxable income. Generally, quarterly estimated tax payments of this tax should be made throughout the year. 501(c)(3) organizations do not have a requirement to report the percentage of membership dues allocable to lobbying or to pay a proxy tax since lobbying expenditures are reported on Schedule C, Part II-A of Form 990.
There is a $2,000 in-house lobbying exception to this rule. If you incur $2,000 or less annually on in-house efforts, there is no need to pay a proxy tax or notify your members of the nondeductible portion of their dues.
Grassroots Lobbying
Grassroots lobbying is protected under the First Amendment and is generally defined as the mass mobilization of the public around a particular legislative issue, such as proposing harsher legislation for gun violence. The audience, here, is the general public. Grassroots lobbying must have all of the following elements:
Communication
With the general public (except in cases of ballot measures up for public vote)
That expresses a view about specific legislation
And includes a call to action
Drafting open letters to the public, organizing a public demonstration, creating a petition, holding a press conference, implementing social media tactics, and urging the general public to contact their legislators to express a view on a particular issue are all examples of grassroots lobbying.
When nonprofits are involved in grassroots lobbying, they cannot both state their position on the particular legislative issue and then urge their own members to contact a member of a legislative body who might have a vote on the issue. These actions will cause the efforts to be considered direct lobbying. For this purpose, members also include donors who have given significant amounts of time and money.
When considering your budget for lobbying, it can be advantageous to hire a lobbyist or a lobbying firm. In doing so, it’s best to issue a Request for Proposal (RFP) to help ensure competitive pricing, experience in working on the issues that pertain to your organization’s mission, and identifying any potential conflicts of interest (does the lobbyist work on causes that are in opposition to your mission?).
There are other activities that may sound like lobbying efforts, but actually do not fit in either the direct lobbying category or the grassroots lobbying category. Nonpartisan study/research or responses to direct inquiries made by a legislator regarding a particular issue do not count as lobbying. Communications with a legislator regarding possible legislative actions that could jeopardize the existence or exempt status of the nonprofit organization are also permissible communications that do not count as lobbying.
501 (h) Election
While public charities may not engage, directly or indirectly, in any political campaign efforts, most public charities may engage in an insubstantial amount of legislative lobbying. Very unfortunately, the term “insubstantial” for this purpose has never been defined by the IRS or by Congress. The IRS has stated on numerous occasions that they will weigh the facts and circumstances of each situation. In order to avoid such a subjective yardstick, many public charities file for an (h) election by submitting Form 5768, Election/Revocation of Election by an Eligible Section 501(c)(3) Organization to Make Expenditures To Influence Legislation. This (h) election permits public charities under 501(c)(3) to make limited expenditures on both direct lobbying and on grassroots lobbying. The allowable amounts are measured by an objective expenditure test. The (h) election ensures the public charity knows where the line is so that it will not overstep the IRS limitations on lobbying activities. An excise tax under Code Section 4911 will be assessed if this line is crossed. This tax is equal to 25% of the amount of excess lobbying expenditures for that taxable year. Volunteer time does not count against this cap. There is also a 4-year lookback test for total lobbying expenditures that, if failed, will result in the loss of the organization’s exempt status.
Annually, this objective expenditure text is calculated in Schedule C, Part II-A of the organization’s annual Form 990 return. Even for very large public charities, the total lobbying expenditures can never exceed $1,000,000 before the excise tax is triggered.
As I mentioned, most public charities may engage in an insubstantial amount of legislative lobbying. Those public charities that may not engage in these activities and, therefore, cannot file the (h) election include places of worship and auxiliaries, associations, or conventions of places of worship.
Section 527(f) Tax on Political Activities
Any 501(c)(4), 501(c)(5), or 501(c)(6) organization that makes expenditures to influence or attempt to influence the selection, nomination, election, or appointment of any individual to any federal, state, or local public office or office in a political organization (again, “political campaign efforts”) is subject to the Section 527(f) tax. The tax is generally the lesser of:
The organization’s net investment income for that taxable year, or
The aggregate amount of expenditures made in political campaign efforts for that taxable year.
Again, 501(c)(3) organizations cannot conduct any political activities or they will lose their tax-exempt status. 501(c)(3) organizations will often create a separate and related 501(c)(4) or 501(c)(6) organization in order to conduct a limited amount of political activities.
Political Action Committees (“PACs”)
Section 527(f) tax can be avoided entirely if the 501(c) organization creates a separate Political Action Committee (“PAC”) organization to make these expenditures for political campaign efforts. PACs must register with the Federal Election Commission within 10 days of its formation if spending more than $1,000 to influence a federal election.
When funds are contributed to a political candidate, these “hard money” contributions must come from either an individual or a PAC. These contributions must follow the limits set annually by the Federal Election Commission, which are currently $5,000 annually to a candidate and $15,000 annually to a national political party. A PAC is allowed to receive up to $5,000 per year from an individual donor.
“Soft money” funds are contributed to a political party or a PAC. The Supreme Court’s ruling on soft money says these funds can only be used for “party-building activities” such as voter registration or advocating for legislation and not to fund a candidate’s election efforts. Per the 2010 Supreme Court case Citizens United v. Federal Election Commission, there are no limits on soft money contributions, since these amounts are not directly paid to a candidate and are considered a form of free speech protected by the First Amendment of the U.S. Constitution. This is why the number of PACs have mushroomed in the last decade. It’s important to note that PACs cannot be directly influenced by a political candidate, nor can a political candidate directly dictate the messaging issued by a PAC.
527 organizations PACs that are not regulated under state or federal campaign finance laws since they do not expressly advocate for the election or defeat of a candidate or party. Most 527 organizations must register with the IRS by filing Form 8871 and must publicly disclose their donors. 527 organizations must also file periodic reports of contributions and expenditures.
Super PACs can raise unlimited amounts from individual donors but cannot contribute directly to a particular candidate.
Excess Compensation for Executives
With certain exceptions (farmers’ cooperatives and 527 political organizations, certain parachute payments), if total remuneration exceeds $1 million in a calendar year, a nonprofit organization is subject to 21% excise tax.
