Back to Basics: Comparing Tax-Exempt Organizations

With school back in session and fall in the air, it’s the perfect time to get back to basics on the Rules of the Game podcast. On today’s episode, we’ll review how the advocacy rules differ across the various types of tax-exempt organizations, including 501(c)(3)s, 501(c)(4)s, and PACs. Whether you’re a seasoned advocate or just starting out, understanding these fundamentals is crucial for crafting bold advocacy plans that maximize your capacity and comply with the appropriate rules. Join us for a quick refresher!

 

Attorneys for this Episode

Melissa Marichal Zayas

Natalie Ossenfort

Susan Finkle Sourlis

 

Comparison of tax-exempt organizations

There are many different types of tax-exempt organizations – our federal tax code offers 29 different types of tax exemptions to choose from!

501(c)(3)s

501(c)(3) organizations are tax-exempt, and donations to 501(c)(3)s are tax deductible. With this favorable treatment come some restrictions related to lobbying and election season advocacy.

·      Public Charities (including Community / Public Foundations)

o   Prohibited from supporting or opposing candidates for public office

o   Allowed to lobby so long as they stay within certain lobbying limits and use unrestricted dollars to pay for lobbying activities

o   May also conduct nonpartisan election-related activities including voter outreach, voter education, voter registration, etc.

·      Private Foundations

o   Prohibited from supporting or opposing candidates for public office

o   Effectively barred from lobbying due to a steep excise tax that applies to private foundation lobbying expenditures

o   Should also be aware of specific rules related to voter registration activities

 

501(c)(4) social welfare organizations, 501(c)(5) unions, and 501(c)(6) trade associations

These organizations enjoy tax exempt status, but donations to them are not tax-deductible for the donor. However, they can engage in a wider array of advocacy activities than 501(c)(3)s.

·      They are allowed to lobby without tax code lobbying limits.

·      They can engage in some partisan political activity as a secondary purpose (for example, express advocacy).

·      When engaging in partisan activities, they need to be aware of campaign finance regulations and reporting thresholds.

·      At the federal level (and in most states), corporations - including tax-exempt organizations - are prohibited from making monetary or in-kind contributions to candidates or political parties.

 

527 – political organizations

527 political organizations include political parties; campaign committees for candidates running for federal, state, or local office; and federal or state political action committees (“PACs”).

·      The primary purpose of a 527 must be to engage in activities that influence the selection, nomination, election or appointment of an individual to a public office or an office in a political organization.

·      They do not generally engage in lobbying. Their lobbying expenditures may be subject to tax if the lobbying does not further political purposes.

·      There are many types of PACs, including traditional PACs and Super PACs.

 

How can these organizations work together? 

Despite the different restrictions on lobbying and political activity, there are several ways to safely collaborate with organizations that have a different type of tax exemption.

 

501(c)(3) private foundations & 501(c)(3) public charities

·      Private foundations and public charities can engage in joint nonpartisan, non-lobbying activities, like public education campaigns.

·      Private foundations can also fund public charities, but they must ensure that they don’t earmark any funds for lobbying.

 

501(c)(3) private foundations & 501(c)(4)s/501(c)(5)s/501(c)(6)s

·      Private foundations can also fund 501(c)(4)s, (c)(5)s, and (c)(6)s, but they must follow what are called the expenditure responsibility rules when granting to any non-(c)(3) organization.

 

501(c)(3) public charities & 501(c)(4)s/501(c)(5)s/501(c)(6)s

·      Public charities, including public and community foundations, can also collaborate with and fund (c)(4)s, (c)(5)s, and (c)(6)s.

·      Remember, your tax-exempt status follows your organization into any coalition work, so (c)(3)s must track any lobbying they engage in on behalf of or in support of the coalition and continue to stay within their lobbying limits.

·      All joint activities and campaigns must be nonpartisan, and any grants from a c3 to a c4 must prohibit the use of funds for partisan political activity.

·      The IRS will count the full grant from a c3 public charity to a c4 as a (c)(3) grassroots lobbying expenditure, unless the grant agreement explicitly prohibits the use of funds for lobbying or states what portions may be used for direct and for grassroots lobbying.

 

501(c)(4)s/501(c)(5)s/501(c)(6)s & 527 political organizations

·      501(c)(4)s, and all other corporations, should avoid making monetary or in-kind contributions to a political organization or candidate. These types of contributions are prohibited in federal elections, as well as in most state and local elections.

·      However, 501(c)(4) corporations may establish a traditional federal PAC via a Separate Segregated Fund.

o   501(c)(4) corporations may not contribute to this federal PAC or any other political organization, but they can pay for a connected SSF’s administrative costs.

o   There are other special limitations for this type of PAC, including that it can only raise funds from the connected organization’s bona fide members and its executive and administrative personnel and their families.

 

Resources

·      Alliance for Justice, The Connection: Strategies for Creating and Operating 501(c)(3)s, 501(c)(4)s, and Political Organizations (See p. 11 for chart comparing tax-exempt organizations)

·      Alliance for Justice, Focus on Foundations

·      Alliance for Justice, An Introduction to PACs

·      Alliance for Justice, How to Fund a 501(c)(4)