The goals of 501(c)(3) public charities often intersect with the desire to influence legislation (also known as lobbying).
In such circumstances, an existing 501(c)(3) public charity has at least two options. It can lobby to the limited extent allowed by the IRS rules governing tax-exempt public charities, or it can start a separate 501(c)(4) social welfare organization that can engage in unlimited lobbying without jeopardizing either organization’s federal tax-exempt status.
What is Lobbying?
The IRS defines lobbying as an attempt to influence congressional actions and the actions of state legislatures and local governing bodies. This includes reaching out directly to public officials or their employees to influence specific legislation (phone calls, emails, etc.) or trying to influence the general public to do the same.
Not all legislation-related activities count as lobbying. Distributing educational materials about potential legislative actions, urging administrators to enforce existing regulations, publishing nonpartisan studies, and communicating with representatives about legislation that could negatively impact an organization’s tax-exempt status (among other similar possibilities) aren’t considered lobbying as the IRS defines the term.
Lobbying as a 501(c)(3) Public Charity
501(c)(3) public charities are allowed to lobby, but lobbying can only make up a small part of the organization’s activities. And the legislation in question must be relevant to the nonprofit’s charitable goals. Substantial lobbying efforts, however, can lead the IRS to revoke a 501(c)(3) public charity’s federal tax-exempt status.
The safest way to ensure your 501(c)(3) public charity complies with the IRS rules is to take the 501(h) election by filing Form 5768 with the IRS, which allows a nonprofit’s lobbying efforts to be measured by the so-called expenditure test. The expenditure test defines how much a public charity can spend on its lobbying efforts based on the total amount of money it spends toward its tax-exempt purposes. You can find a handy breakdown of how much money a given organization can spend on lobbying under the expenditure test at the IRS website.
What Is a 501(c)(4) Social Welfare Organization?
501(c)(4) social welfare organizations resemble 501(c)(3) charities in that they are tax-exempt nonprofits that purport to exist for the public good, but, unlike public charities, social welfare organizations can make it their primary goal to actively support or oppose specific legislation, and they can even take part in limited political campaign activism. The catch is that contributions to social welfare organizations, unlike contributions to public charities, are not tax-deductible by their donors.
How to Start a 501(c)(4) Social Welfare Organization
Starting a 501(c)(4) social welfare organization is a lot like starting a 501(c)(3) public charity. As with a 501(c)(3) charity, you’ll start by incorporating or organizing your 501(c)(4) nonprofit at the state level. Once the state approves your nonprofit’s articles of incorporation, you can then get an employer identification number (EIN) from the IRS, elect directors and adopt corporate bylaws, and open a bank account in your nonprofit’s name.
One key difference, however, is that whereas 501(c)(3) charities are required to seek recognition of their tax-exempt status from the IRS, this is an optional step for 501(c)(4) social welfare organizations. Instead, all social welfare organizations are required to declare their intent to operate as a social welfare organization within 60 days of incorporating at the state level. This requires filing IRS Form 8976, the Notice of Intent to Operate Under Section 501(c)(4). You’ll submit Form 8976 online, and it comes with a $50 submission fee.
Even though 501(c)(4) organizations can self-declare their tax-exempt status, your social welfare nonprofit can also seek formal recognition of its tax-exempt status by submitting Form 1024-A to the IRS. Form 1024-A comes paired with an attached Form 8718 (the User Fee for Exempt Organization Determination Letter Request) and a filing fee of $600. Perhaps the best reason for submitting Form 1024-A, despite its cost, is that your social welfare organization can be sure it will operate in accordance with Section 501(c)(4) of the Internal Revenue Code. Note that while it’s common for states to exempt 501(c)(4) organizations from the state corporate tax, states are less likely to grant sales and use tax exemptions to 501(c)(4) social welfare organizations.
Maintaining Legal Separation
If your 501(c)(3) public charity decides to start an affiliated 501(c)(4) social welfare organization, it will be important to maintain each organization’s distinct legal existence. They must incorporate separately, keep distinct financial records, and have their own boards of directors and corporate bylaws. The two organizations, in other words, can be affiliated, but one organization cannot be a mere arm of the other.
This doesn’t mean the two organizations can’t overlap in significant ways. They may share the same employees and volunteers, even the same directors, but the time allotted to the pursuit of each organization’s goals must be carefully distinguished and recorded, and both organizations must pay (and formalize) their fair share in any joint expenses and stick only to those activities allowed for each organization by the IRS. Your 501(c)(4) social welfare organization can take part in political campaign activities, for instance, throw its support behind a particular political candidate and running advertisements opposing another political figure, but 501(c)(3) public charities are completely restricted from electioneering of any kind.
Some Final Thoughts
Ultimately, your 501(c)(3) public charity’s decision to start a 501(c)(4) social welfare organization should rest on your organization’s understanding of its charitable goals, the attitudes of its potential donors, and the possible administrative costs involved in starting a separate organization that focuses on lobbying. If your organization’s lobbying efforts are likely to sail past the restrictions imposed by the IRS, or if you simply don’t want your charity’s activities and revenue going toward lobbying, starting an affiliated 501(c)(4) social welfare organization may be an option worth exploring.