While both social welfare organizations and charitable organizations enjoy tax-exempt status under the Internal Revenue Code (IRC), that status originates from different sections of the IRC. As a result, these two types of organizations have different purposes that are clearly defined in their respective sections of the IRC. They also are subject to different rules necessary to maintain their tax-exempt status.
Defining Social Welfare Organizations
The IRC defines social welfare organizations under IRC §501(c)(4). These tax-exempt organizations must not be organized for profit and must be operated exclusively to promote social welfare. In other words, the organization must primarily operate to further the common good and general welfare of the people of the community that it serves. Examples of organizations that would NOT qualify as social welfare organizations include:
- Organizations that limit the use of their facilities to the employees of certain corporations and their guests
- Organizations formed to represent member-tenants of a certain apartment complex
- Organizations that operate social clubs for the benefit, pleasure, or recreation of its members
- Organizations carrying on businesses with the general public similar to those businesses operated for profit
Earnings of Social Welfare Organizations
Any earnings of a social welfare organization may not benefit any private shareholder or individual. For example, suppose a social welfare organization engages in an excess benefit transaction with any person having a substantial influence over the organization. In that case, the Internal Revenue Service (IRS) can impose an excise tax on the person and any organization managers that agreed to the transaction.
Social Welfare Organizations and Political Activities
A social welfare organization may seek legislation relevant to its programs as a permissible means of attaining and carrying out its purposes. Therefore, a social welfare organization can primarily engage in lobbying. However, 501(c)(4) organizations that engage in lobbying must either provide notice to their members concerning the percentage of dues attributable to lobbying activities or pay a proxy tax. Furthermore, an organization that previously lost its 501(c)(3) tax-exempt status due to substantial impermissible attempts to influence legislation cannot later qualify as a 501(c)(4) organization.
Nonetheless, a social welfare organization may not directly or indirectly participate or intervene in political campaigns on behalf of or in opposition to any candidate for public office. The organization may engage in some political activities, so long as those activities are not its primary focus.
Defining Charitable Organizations
Charitable organizations are organized and operated exclusively for exempt purposes under IRC §501(c)(3). These organizations typically are public charities or private foundations and can include churches, hospitals, and medical research institutions. Charitable organizations have purposes that may be scientific, literary, religious, or related to some specific cause, such as poverty or homelessness.
Earnings of Charitable Organizations
Like social welfare organizations, none of the earnings of charitable organizations may benefit any private shareholder or individual. If a social welfare organization engages in an excess benefit transaction with any person having a substantial influence over the organization, the Internal Revenue Service (IRS) can impose an excise tax on the person and any managers of the organization that agreed to the transaction.
Charitable Organizations and Political Activities
Charitable organizations also may not attempt to influence legislation as a substantial part of their activities or participate in any campaign activities on behalf of or against any candidate for public office.
While social welfare organizations can engage in lobbying as a primary purpose, charitable organizations may not do so as their primary purpose or to any extent beyond an “insubstantial degree.” While no IRS regulation specifically defines “insubstantial,” the IRS has acquiesced to charitable organizations spending up to five percent of their budget, time, and effort on lobbying. This could be viewed as acknowledging that this is the threshold for defining “substantial” and thus violative of IRS regulations. However, we caution that the IRS has not expressly stated this.
Rather than relying on an imprecise definition of “substantial,” charitable organizations alternatively can utilize the expenditure test outlined in IRC § 501(h). This test caps a charitable organization’s lobbying activities at specific dollar limits with an ultimate cap of $1 million. However, lobbying activities by volunteers on behalf of the charitable organization do not count toward those limits.
Nonetheless, charitable organizations may still engage in policy advocacy activities without endangering their tax-exempt status due to the violation of lobbying restrictions. For instance, these organizations can advocate for certain policy changes before non-legislative bodies, such as school boards or public agencies. They also can freely advocate for or against ballot initiatives or referendums.
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