Rise in 501(c)4 Nonprofits

There has been a rise in the number of 501c4 nonprofits known as “social welfare” organizations over the past 10 years.  Recent changes in tax laws effecting charitable deductions have resulted in a shift from the 501c3 category to the less restrictive c4 category.  Social-welfare organizations, c4s, are exempt from federal income tax, but donations to c4s are not deductible. However, unlike c3s organizations, the c4s can lobby as much as they wish and engage in partisan political campaigns “as long as that work is not their ‘primary’ purpose or activity.”

Additional c4 Benefits

For those who have experienced the burdensome process of completing the IRS Form 1023 or 1024, Application For Recognition of Exemption, there is another benefit for c4s. Legislation enacted a few years ago added Section 506 to the Internal Revenue Code.  This Section requires an organization to notify the IRS of its intent to operate as a 501c4 organization.  Additionally, the IRS developed a very simple online application – Form 8976 – which is a quick way to notify the IRS – no IRS approval required.  Check out Application for Recognition of Exemption.

In July 2018  Revenue Procedure 2018-38 was released, eliminating the requirement for most tax exemption organizations, including c4s (but not c3s), to file a Schedule B with the Form 990 or 990-EZ for fiscal years ending 12/31/2018 or later. The confidential nature of the Schedule B is a hot topic!  Two states, California and New York, require the Schedule B as part of the annual charity registration renewal process. Both states are continually embroiled in litigation with nonprofit organizations challenging the requirement to file an unredacted Schedule B in a state filing.  Social welfare organizations must continue to collect and maintain donor names and addresses as the IRS may request the information. The new procedure does not change the requirement for all 501c organizations to make their annual return available to the public, less the name and address on the Schedule B.

The Future of c3s?

What’s in the future for c3s? In 2017 tax changes in the standard deduction mean fewer taxpayers will be eligible to itemize and claim charitable deductions.  In a recent article by Tim Delaney and David Thompson in The Chronicle of Philanthropy, https://www.philanthropy.com/article/The-Effects-of-2019-Tax-Policy/245464, the authors believe 2019 will be the year important questions are answered:

• Will donations plummet for c3 charitable organizations?
• Will nonprofits owe tens of thousands of dollars to governments because of new taxes levied in the Tax Cuts and Jobs Act and similar laws in the states?
• What will it cost to overhaul accounting systems and other processes to accommodate the record keeping required by the federal tax law and resulting state tax changes?

Cake and Eat it Too!  

Several c3s have created affiliated c4s so they can have their cake and eat it, too!  The activities that are prohibited for c3s can be spun off to the c4, with the loss of tax-deductible donations now having less impact for many donors.