501(c)(4) is the second most common basis of tax-exemption after 501(c)(3). 501(c)(4) social welfare organizations include several well-known advocacy organizations including the Sierra Club, the ACLU, Planned Parenthood, the NRA, and AARP. However, the majority of 501(c)(4) organizations – an estimated 85 percent – do not engage in issue advocacy, lobbying, support for candidates and ballot initiatives, and partisan voter registration, education, and mobilization. See Nonprofit Political Engagement: The Roles of 501(c)(4) Social Welfare Organizations in Elections and Policymaking.
To qualify as tax-exempt under Section 501(c)(4) of the Internal Revenue Code, an organization must not be organized for profit and must be operated exclusively to promote social welfare. The regulations clarify that the word exclusively in this context actually means primarily.* And promoting social welfare means promoting in some way the common good and general welfare of the community. While this sounds very similar to a 501(c)(3) exempt purpose, social welfare can be interpreted as a broader catch-all provision that encompasses social good purposes beyond 501(c)(3). Note that any valid 501(c)(3) purpose would likely fall within a valid 501(c)(4) purpose.
* While the interpretation of exclusively to mean primarily is also found in the regulations applicable to Section 501(c)(3), primarily in the 501(c)(4) context does not appear to have the same meaning as in the 501(c)(3) context. Primarily in the 501(c)(3) context allows for only an insubstantial amount of activities not in furtherance of the organization’s exempt purpose. In contrast, primarily in the 501(c)(4) context has been interpreted by many practitioners as allowing for any amount of activities less than 50 percent of the organization’s total activities to be not in furtherance of the organization’s exempt purpose. I, however, think this interpretation may not be well-grounded in the law and may be revisited at some point in the future.
Similar to 501(c)(3) organizations, the earnings of a 501(c)(4) organization may not inure to the benefit of any private shareholder or individual (e.g., board member), and excessive benefits provided by the organization to any disqualified person (including board members, officers, and others with substantial influence over the organization’s activities) may subject such disqualified person and organizational managers who knowingly approved such transactions to excess benefit transaction penalty taxes also referred to as intermediate sanctions.
Unlike 501(c)(3) organizations, 501(c)(4) organizations are permitted to engage in unlimited lobbying in furtherance of their social welfare purposes. Also, 501(c)(4) organizations may participate or intervene in political campaigns on behalf of or in opposition to any candidate for public office, even though such activities are considered not in furtherance of social welfare purposes, so long as such activity is not the organization’s primary activity. For those 501(c)(4) organizations that adopt an aggressive posture, 49 percent of their spending on political campaign intervention may be their strategy, often with much of their remaining activities in indirect support of such intervention. While 501(c)(4) organizations may engage in lobbying and political campaign intervention activities, such activities may trigger a tax obligation under IRC Section 527(f) or a proxy tax under IRC Section 6033(e).
With the broader allowance of exempt purposes and greater flexibility in lobbying and political campaign intervention, 501(c)(4) organizations generally are not eligible to receive deductible charitable contributions. This may have decreasing importance to potential donors as, after the law known as the Tax Cuts and Jobs Act of 2017 went into effect, less than 14 percent of taxpayers itemize their deductions and are able to take a charitable contribution deduction. So, for 86 percent of taxpayers, there is no tax benefit for giving to a 501(c)(3) charitable organization instead of a 501(c)(4) social welfare organization that may use as much as 49 percent of the donations it receives to support a particular political candidate.
But while a gift to a 501(c)(4) organization might not provide a donor with an income tax deduction, such gift is not subject to the gift tax (18% to 40%) and it can lower the amount in a donor’s estate that might otherwise be subject to the estate tax (18% to 40%). Particularly for donors not concerned with income tax deductions (e.g., billionaire tech company CEOs that make very little in salary), the tax benefits of giving to a 501(c)(4) organization can still be huge. See this excellent and humorous post by Karl Mill of the Mill Law Center with more details. [Updated paragraph – 4/25/23]
A recent attractive feature for some donors to 501(c)(4) organizations is the lack of public disclosure of their identities and contributions. But this comes with some public policy challenges as it helps facilitate more dark money to flow through 501(c)(4) organizations. See Treasury Eliminates Donor Information Disclosures by 501(c)(4) and 501(c)(6) Organizations.
Another important limitation for 501(c)(4) organization leaders to be aware of is the reluctance of most private foundations to provide grants to 501(c)(4) organizations. This may be due to several factors including because (1) the foundations would be required to exercise expenditure responsibility in order to make such grants and (2) they may be concerned with a 501(c)(4) grantee using their grants to engage in lobbying or political intervention activities, which could subject to a private foundation to penalty taxes. Nevertheless, some private foundations will support 501(c)(4) organizations with restricted grants to exclusively further charitable purposes.