Among the restrictions placed on 501(c)(3) nonprofits are strict limits on their political activities. Certain types of political speech can cause a 501(c)(3) to lose its federal tax status, exposing the organization to income taxes and potentially invalidating the tax-exempt status of donors’ gifts. For an organization that is interested in shifting its activities into the political arena, pursuing a designation as a 501(c)(4) organization may be preferable. Section 501(c)(4) of the Internal Revenue Code provides an exemption from federal income tax for organizations that are organized to promote public welfare. Among other things, a 501(c)(4) organization can engage in lobbying activities, run political ads, and so on.
One of the first things managers will encounter as they evaluate the question of “conversion” is that a 501(c)(3) entity often is restricted from doing things that would invalidate its 501(c)(3) status. Nonprofit corporations often include specific requirements that the organization maintain its 501(c)(3) status, which binds the board and members and would invalidate an attempt to get the IRS to recharacterize the entity. As a consequence, a new legal entity might be required.
Forming a new entity need not be a significant burden. Most of the work involved in creating the new entity would be necessary even if the 501(c)(3) entity could remain as-is. For example, a change of purpose will require extensive revision of charter documents. That said, some 501(c)(3)s may face additional complications when they go to transfer their assets into a 501(c)(4). When they are dissolved, 501(c)(3)s are required to transfer their assets to another qualified charity. A transfer to a 501(c)(4) at the dissolution stage may be illegal. Therefore the 501(c)(3) may need to transfer assets to the 501(c)(4) by means of a grant.
An alternative to dissolving the 501(c)(3) entity is to establish a separate 501(c)(4) to house the group’s political activities. Following such a strategy allows a 501(c)(3) to continue receiving tax-deductible donations while providing financial support to a 501(c)(4)’s political activities. This approach requires care to preserve the separation of the two entities and avoid jeopardizing the 501(c)(3)’s status.
The process of “converting” a 501(c)(3) into a 501(c)(4) is quite involved and needs to be handled with an attorney’s assistance. The Church Law Center of California counsels churches and secular nonprofits. We are happy to help your organization evaluate its options for pursuing political activities, whether that means forming an affiliate entity or transferring a 501(c)(3)’s assets to a new nonprofit. Call us today at (949) 892-1221 or reach out to us through our contact page.