How to Avoid Jeopardizing Your Social Welfare Organization’s 501(c)(4) Tax-Exempt Status

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Social welfare organizations enjoy tax-exempt status under §501(c)(4) of the Internal Revenue Code (IRC). However, these organizations must meet certain requirements under the IRC to maintain their tax-exempt status. As a result, social welfare organizations must be aware of these requirements and take measures to comply with them.

If your social welfare organization needs legal advice or assistance regarding its tax-exempt status, contact an experienced §501(c)(4) lawyer today. Call the offices of the Church Law Center at (949) 892-1221 or contact us online for more information today.

Defining Social Welfare Organizations

Under IRC §501(c)(4), social welfare organizations must not be organized for profit and must operate exclusively to promote social welfare. The primary motivation for its operations must be to further the common good and welfare

Generally, social welfare organizations take one of the following three forms:

  • Organizations that may be performing some public or community benefit but whose principal feature is lack of private benefit or profit;
  • Organizations that would qualify for exemption under section 501(c)(3) but for a defect in their organizing documents or if they were not “action organizations”; and
  • Nonprofit organizations traditionally have been labeled in common parlance as social welfare organizations.

According to the IRS, one example of a social welfare organization includes an organization that encourages industrial development and relieves unemployment in a geographical area by making loans to businesses willing to relocate. Another example of a social welfare organization is an organization that holds an annual festival of regional customs and traditions.

Activities that May Jeopardize a Social Welfare Organization’s 501(c)(4) Tax-Exempt Status

Activities that Do Not Promote the Social Welfare

A social welfare organization may jeopardize its 501(c)(4) tax-exempt status if it engages in activities that do not promote the social welfare. For instance, engaging in the following types of activities does not promote the social welfare:

  • Restricting the use of their facilities to employees of certain corporations and their guests, which benefits a private group rather than the social welfare;
  • Representing the interests of tenants of a particular apartment complex, but not all tenants in a particular community;
  • Operating a social club for the benefit, pleasure, or recreation of its members; or
  • Carrying on a business with the general public like organizations operated for profit.

Earnings that Inure to a Private Shareholder or Individual

Another fundamental attribute of a social welfare organization is that earnings may not benefit any private shareholder or individual. If the organization engages in a transaction that benefits someone who has a substantial influence over the organization, then the IRS can impose an excise tax on the transaction, thus defeating the purpose of the organization being tax-exempt.

Engaging in Prohibited Political Activities

§501(c)(4) organizations can engage in unlimited lobbying to carry out their objectives. However, they either must notify their members of the percentage of dues applicable to lobbying activities or pay a proxy tax. Social welfare organizations also may engage in political activity, so long as political activity is not their primary focus. What constitutes a “primary focus” on engagement in political activity is rather unclear. One school of thought is that so long as political activity by the social welfare organization is not more than 49% of the organization’s overall activity, its primary focus is not engaged in political activity.

Failing to File Annual Tax Returns

Tax-exempt status under §501(c)(4) does not exempt most organizations from filing Form 990, Return of Organization Exempt from Income Tax, each year. Social welfare organizations must report their annual expenses and earnings on this form. Failure to file this form as required can result in the revocation of tax-exempt status under §501(c)(4). More specifically, if a social welfare organization fails to file its Form 990 for three consecutive years, the IRS automatically revokes its tax-exempt status.

Call Church Law Center Today

Don’t hesitate to contact an experienced §501(c)(4) attorney at Church Law Center when you need assistance with legal issues related to your California church, religious organization, §501(c)(4) social welfare organization, or nonprofit organization. You can reach our offices by calling (949) 892-1221 or contacting us online to learn more about how we can help. We offer a wealth of experience handling the unique legal issues that nonprofit and religious organizations routinely face.

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