The laws of the United States provide several avenues for organizations to promote political ideas without being subject to income tax. The favorable treatment these organizations receive allows groups to more effectively organize and pool resources, ultimately enhancing the Constitution’s guarantee of free speech. Two of the common forms of organization formed for this purpose are the 501(c)(4) social welfare organization and the political action committee, or PAC.
What is a 501(c)(4) social welfare organization?
A social welfare organization is an entity organized under state law, like a California nonprofit corporation, that also complies with the rules under section 501(c)(4) of the Internal Revenue Code (IRC). An organization that complies with these rules is exempted from paying federal income taxes on its revenues. Unlike donations to a 501(c)(3) charity or religious organization, donations to a 501(c)(4) entity are not tax generally deductible for the donor.
A 501(c)(4) is a popular choice for groups that wish to pursue activities that are intended, broadly speaking, to promote change within society. A chief reason for choosing 501(c)(4) over 501(c)(3) is that a 501(c)(4) is permitted to lobby for legislative or regulatory changes, and is also allowed to promote its agenda through public campaigns so long as these efforts do not become a primary activity of the organization. The National Rifle Association is a good example of a high profile 501(c)(4) that demonstrates an extensive engagement in political activity.
What is a PAC?
An important limitation of the 501(c)(4) is that it cannot be organized primarily for the purpose of influencing political campaigns. Although a 501(c)(4) may offer endorsements of candidates that agree with its positions, it must be careful to avoid appearing to be primarily about supporting a particular candidate or party. If a group wants to organize primarily to support a particular federal political campaign, it should look at forming a PAC instead.
A PAC’s chief purpose is to pool money together from its members and contributors for purposes of supporting a particular candidate or political issue. By definition, a federal PAC is an organization that raises or spends more than $1,000 in a calendar year in connection with supporting a candidate or issue in a federal election. Federal PACs are governed by federal election law, which requires registration with the Federal Election Commission and provides specific limits on how much a PAC can directly contribute to a candidate per election ($5,000) or to a national party per year ($15,000). A PAC is allowed to receive up to $5,000 per year from an individual donor.
A Super PAC is a variant of the PAC. A Super PAC is allowed to raise an unlimited amount from individual contributors, so long as the contributors are located within the United States. A Super PAC is also allowed to spend an unlimited amount on independent efforts, like advertising, in support of a political candidate or issue. However, a Super PAC is not allowed to contribute directly to a particular candidate and is prohibited from coordinating its activities with a candidate’s campaign.
The intersection of PACs and 501(c)(4)s
501(c)(4) organizations, PACs and Super PACs are each subject to distinct registration, fundraising and disclosure rules. Organizations with sufficient access to financing will sometimes form more than one type of organization and pass money from one to the other to ensure that its political activities do not threaten the nonprofit status of its 501(c)(4) “wing.” This practice is sometimes described as “dark money” due to the ability of 501(c)(4)s to keep donor identities secret. In practice these schemes require careful planning and management to comply with law. The Church Law Center of California provides legal counsel to religious and secular nonprofits. We can help your organization evaluate its options to choose the best structure for its intended purpose and activities. To schedule an appointment call us today at (949) 689-0437 or reach out to us through our contact page.