Understanding the Tax-Exempt Status of Social Welfare Organizations

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A nonprofit that plans to do political work—lobbying, proposing legislation, and so on­—can receive tax-exempt status from the IRS and state tax authorities as a social welfare organization. At the federal level such organizations must meet the requirements of Internal Revenue Code (IRC) Section 501(c)(4). California’s exemption for social welfare organizations is found in Section 23701f of the California Revenue and Taxation Code. There are a number of important principles to understand about what “tax exempt” means for such organizations. Here are a few.

  • Qualified organizations may still owe taxes.

The chief benefit of qualifying under IRC Section 501(c)(4) and equivalent state laws is the organization’s exemption from most income tax. If the organization engages in business that doesn’t meet the requirements of its stated mission it may owe separate income tax for revenue it generates from those activities. Unless specifically exempted by the applicable agency, the organization may also be subject to other forms of tax, such as sales tax, employment tax, and property taxes.

  • The exclusive purpose requirement.

IRC Section 501(c)(4) provides that an organization must be operated exclusively to promote public welfare to qualify for tax-exempt status under the statute. IRS regulations lend a bit of fuzziness to the statute’s exclusivity requirement, by providing that organizations satisfy it if they are “primarily engaged in promoting in some way the common good and general welfare of the community” (emphasis added). Conversely, a 501(c)(4) entity cannot be organized primarily for the private benefit of certain individuals. It should come as no surprise that this flexibility is full of pitfalls. An organization should consult with an attorney before engaging in activities that aren’t clearly aligned with its social welfare mission.

  • Donations to a 501(c)(4) organization are not tax-deductible.

Gifts to a 501(c)(4) organization are not tax deductible for their donors. This is one of the more important distinctions between a 501(c)(4) organization and charity qualifying under another part of IRC Section 501. Essentially, the 501(c)(4) organization trades gift tax-deductibility for the ability to engage in lobbying activities. It is vitally important that organizers not misrepresent the tax treatment of donations.

  • Notice and registration requirements.

Under IRC Section 506 an organization must notify the IRS of its intent to operate as a 501(c)(4) entity using Form 8976. The filing is made electronically and must be submitted within 60 days of the organization’s formation to avoid late fees. 501(c)(4) organizations also must submit annual information returns with the IRS. California nonprofits also must register with the Attorney General’s Registry of Charitable Trusts using Form CT-1. California requires nonprofits to renew their registrations annually, in addition to submitting informational reports.

The Church Law Center serves California social welfare nonprofits

The Church Law Center of California helps all kinds of nonprofits with matters of organization, governance, and compliance. We have extensive experience working with social welfare organizations to help them achieve their goals. To find out how we can help your organization, call us today at (949) 689-0437 or reach out to us through our contact page.

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