Originally published on LinkedIn.
We’ll see an increase in the number of 501(c)(4) social welfare organizations being formed and receiving contributions. While contributions to 501(c)(4) organizations are not deductible as charitable contributions, this won’t matter to many donors for two major reasons:
With the increase in the standard deduction, there will be a substantial reduction in the number of taxpayers who itemize their deductions. This means that the vast majority (possibly 95%) of taxpayers will get no tax benefits from making a charitable contribution to a 501(c)(3) charitable organization. The Tax Cuts and Jobs Act did not eliminate the charitable contribution deduction. But the Act made the deduction useless for all but a small number of taxpayers. The nonpartisan Tax Policy Center estimates that charitable contributions will decline by about $12.3 billion to $19.7 billion per year as a result of this change.
Because 501(c)(4) organizations can engage in unlimited lobbying in furtherance of their social welfare purposes, and because they can use their resources to support or oppose political candidates, they have greater flexibility and potential power to effect social change than 501(c)(3) organizations. High-profile 501(c)(4) organizations include the ACLU, AARP, the Sierra Club, the NRA, and NOW. For individuals who want to make the most effective use of their monies to fight for, or against, social change, donating to a 501(c)(4) organization may be a good option. And 2018 is looking to be a year in which there are going to be major battles on the social safety net (social security, Medicare, Medicaid), the Affordable Care Act, immigration, Dreamers, North Korea, net neutrality, and the Johnson Amendment (that hasn’t gone away).
What this means for charities
In light of the forces above, charities must make the case for their effective and efficient use of donated funds. Even before President Trump’s election and the tax bills that led to passage of the Tax Cuts and Jobs Act, the numbers of individuals giving to charities has been dropping … significantly. According to The Chronicle of Philanthropy:
Only 24 percent of taxpayers reported on their tax returns that they made a charitable gift in 2015, according to the analysis of Internal Revenue Service data. A decade earlier that figure routinely reached 30 or 31 percent.
It is commonly believed that most taxpayers do not give to charities for the tax deduction, but the tax benefits should not be overlooked as a motivating factor with respect to how much an individual will give. Accordingly, while it may be appropriate for many charities to de-emphasize the deduction in soliciting contributions, they should not ignore its continuing significance for a small minority of donors who may make their decisions with the guidance of CPAs and professional financial planners. This group of donors may be increasingly important as more and more middle-class donors reduce their charitable giving, partly in response to economic pressures and unfavorable tax law and spending changes that have been designed to provide most of their benefits to the wealthy and to corporations.
One particular strategy for charities to consider is to increase their own advocacy efforts. While charities are prohibited under Section 501(c)(3) of the Internal Revenue Code to engage in substantial lobbying or any political campaign intervention, these prohibitions leave open many other avenues of advocacy. See Nonprofit Advocacy is More Than Lobbying (Nonprofit Law Blog). And most charities can safely include lobbying among their activities so long as the lobbying furthers their charitable purposes. See Public Charities Can Lobby: Guidelines for 501(c)(3) Public Charities (Alliance for Justice). Particularly during this challenging time and political landscape, board members of charities must consider advocacy in furtherance of their organizations’ missions an essential board responsibility. See Advocacy: An essential board responsibility.
Dark Money in Politics: A Legal Issue? (WealthManagement.com)
Galle: The Dark Money Subsidy? Tax Policy and Donations to 501(c)(4) Organizations (Brian D. Galle, Nonprofit Law Prof Blog)