You have an issue you feel passionately about. You’ve identified an unmet need and determined an organizational solution. You have created your mission statement and recruited others who care about this issue to make a commitment to serve on your Board of Directors. You’re now hoping to interview employees and volunteers, as well as raise funds to support your cause.
Your soon-to-be-incorporated nonprofit is ready to launch and is ready for official nonprofit status from the federal government. But you’re faced with the question: do I file as a 501(c)(3) nonprofit or 501(c)(4)?
What is the difference between the two? While certain aspects of these filings are similar, there are key differences to take into consideration prior to applying. Your decision will alter the future of your organization.
As per IRS, 501(c)3 is a nonprofit organization for religious, charitable, scientific, and educational purposes. Donations to 501(c)3 are tax-deductible. Whereas on the other hand, 501(c)4 is a social welfare group, and donations to 501(c)4 are not tax-deductible.
Let’s understand 501(c)(3) and 501(c)(4) in more detail below:
A 501(c)(3) nonprofit organization is typically created for religious, charitable, educational, scientific, and/or educational intent. They are tax-exempt, conduct research, and are limited to an amount of lobbying, advocacy, or political activity. Donations to 501(c)(3) organizations are tax-deductible. Churches, cancer research and support groups, women’s shelters, and mentoring programs for at-risk youth are examples of 501(c)(3)groups.
A 501(c)(4) is a “social welfare group” that can advocate for causes and propositions, like 501(c)(3)s. However, 501(c)(4)s can also endorse specific candidates – one of the most substantial differences between the two. Examples of this status include political action groups to advance reproductive or civil rights. While nonprofit organizations with this status are also tax-exempt, donations to 501(c)(4) groups are not tax-deductible.
501(c)(3)s are advocacy and education-based. They often provide direct services to their target population. The types of services provided are broad and diverse, including food distribution through food banks, medical research, after-school programs, health clinics, and mental health services.
These organizations raise public awareness about their causes, and may even teach and train the public about them. They can push forward and endorse legal measures such as propositions so long as they’re relevant to the nonprofit’s purpose.
Similar to 501(c)(3)s, 501(c)(4)s are considered social welfare organizations. They are tax-exempt from federal income taxes and aim to push their mission to the forefront of the public’s consciousness. 501(c)(4)s are allowed to become far more politically involved and partisan than 501(c)(3) organizations.
If a nonprofit organization focused on addressing and ending racism learns that there is a candidate whose platform undermines their mission, their ability to address this will vary based on their federal nonprofit status.
501(c)(3)s can coordinate nonpartisan get-out-the-vote, voter registration, and education drives, as well as nonpartisan voter protection activities.
501(c)(4)s are unlimited in their abilities to lobby for and against the legislation, as well as support and oppose ballot measures. In 2010, the Supreme Court ruled for the 2010 Citizens United decision, allowing corporations and labor unions to register as 501(c)(4)s, and therefore allow unlimited spending on politics with undisclosed donors through political action committees, or PACs.
Both 501(c)(3) organizations and those with 501(c)(4) status are able to advocate publicly for their causes, but because 501(c)(4)s are allowed to lobby and advocate in ways that 501(c)(3)s can’t, 501(c)(4)s have more flexibility in advancing their issues. They can pay for costs necessary to a political organization, compare their own mission with a candidate’s, ask candidates to sign pledges on any issue, and back candidates that reinforce their mission.
As a 501(c)(3), the nonprofit can host a debate between all candidates to bring their views on race and equality to light, but they cannot endorse their candidate of choice. As a 501(c)(4), they would have the ability to endorse a candidate whose views align with their mission, support his or her campaign, and focus on getting out the vote efforts. However, donations to their cause – should it have 501(c)(4) status – would not be tax-deductible.
501(c)(3)s cannot dictate which candidate receives which information—if they want to lobby, they must lobby all interested candidates. The same goes for renting mailings lists and locations to organizations, legislators, and candidates – they must allow every candidate to rent, not just those they personally select.
Should these causes spread into the political realm, 501(c)(3)s only have a limited ability to influence legislation and ballot measures. 501(c)(3)s are not allowed to endorse specific candidates. The nonprofits may also voice opinions of sitting elected officials, but they cannot make personal critiques of the individuals.
Sponsoring debates between candidates regarding the nonprofit’s subject is allowed so long as all candidates are invited and given the opportunity to speak on the issues. 501(c)(3)s can also give voter guides to the public with comparisons between candidates on views of the nonprofit’s issue should the candidate endorse or condone an issue relevant to the 501(c)(3)s.
The nonprofits may also voice opinions of sitting elected officials, but they cannot make personal critiques of the individuals.
Cystic Fibrosis Research Inc. is a 501(c)(3) which endorses measures that are within the realm of their existing mission – for example, a state proposition to advance stem cell research. They do not endorse specific candidates – rather, they educate politicians on both sides of the political aisle to support legislation that will positively impact those living with cystic fibrosis and to vote against measures and bills that will harm or negatively impact their constituents.
Ocean Champions is a 501(c)(4) environment organization that has a political action committee (Ocean Champions PAC). They describe themselves as “the only ocean group that helps elect the Members of Congress who fight for our oceans.” By supporting members of congress, they are utilizing their abilities as a 501(c)(4) organization to support its mission
Many groups have managed to provide direct services and advance their missions as a 501(c)(3) organization, while also advancing their mission through the political arena by establishing a separate 501(c)(4) organization that aligns with their mission.
One 501(c)(3) that also has an action fund is Planned Parenthood. While the organization itself is a nonprofit, advocating “for policy to expand access to health care,” the nonprofit also has an action fund arm: Planned Parenthood Action Fund (PPAF). Through this PPAF, Planned Parenthood is able to “fight to advance and expand access to … health care and defend reproductive rights,” as their mission states.
Depending on your ultimate goal, conduct in-depth research in order to determine which filing works best for you. Whether you’re looking to endorse candidates or simply lobby on an issue relevant to your nonprofit, there is no wrong answer. Do your research, acknowledge your needs, and know that you’re making a difference whether you’re a 501(c)(3) or 501(c)(4).
This section will answer some common queries regarding 501(c)(3) and 501(c)(4) nonprofit organizations.
A 501(c)(3) organization cannot change into a 501(c)(4) organization. But it can dissolve to create a new 501(c)(4) organization. The dissolution clause may prevent the old nonprofit to distribute its assets to the new one, while still allowing to make a grant with certain restrictions. Read more about it here.
While filing form 990 returns, 501(c)(3) nonprofits need to disclose donor information for donations worth $5000 or more to the IRS. The private foundations under this status must also make their donor names available for public inspection. On the other hand, 501(c)(4) nonprofits are exempt from any disclosure.
Volunteer fire companies are exempt as social welfare organizations when they actively engage in fire fighting and disaster assistance. Hence, donations made to their causes are tax-deductible, but they must be solely for the public benefit.
Note: By sharing this information we [Donorbox] do not intend to provide legal, tax, or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here.