U.S. tax law rewards a variety of groups with tax-exempt status based on two key factors — the designated purpose of the group and the ways in which it makes and spends its money. A social welfare group, as classified under Internal Revenue Code section 501(c)(4), is a group organized solely for the promotion of social welfare and operating as a nonprofit organization.
There are several ways in which a social welfare group must operate to retain classification as a 501(c)(4). For starters, the main purpose of the organization must be to improve the overall community in which it operates. In other words, the people the organization represents must not be a very small subgroup of the community, and the group must not exist to serve as a social club or offer its facilities as an exclusive meeting place for select groups. Finally, a 501(c)(4) cannot function as a business in the way a for-profit company would.
One seemingly small but quite important factor pertaining to 501(c)(4) organizations is that donations made to these groups are not tax deductible. Because of this, social welfare groups can engage in political activity to a much greater extent than 501(c)(3) groups, to which donations are tax deductible.
Political and advocacy work
As the sole purpose of a social welfare group is to work toward specific goals related to the wellbeing of the general public, these groups do have some permissions — as well as restrictions — when it comes to engaging in political activity. Promoting a legislative agenda is completely within the rights of a 501(c)(4) group, as enacting legislation would have an effect on the entire community. In other words, engaging in lobbying activity is permissible for social welfare groups, and it won’t have a negative effect on their tax-exempt status.
A social welfare group can also take part in political campaigns. However, there are some restrictions that are important to note. For starters, the group cannot give money directly to individual political candidates. Second, there must be a direct connection between the group’s purpose and the specific campaign in which it’s taking part. For instance, campaigning on behalf of a candidate whose stated policy towards the group’s particular cause happens to align with the group’s own platform would be a sufficient connection justifying its participation in the campaign.
Finally, political campaigning cannot account for more than half of a social welfare group’s activity if the group intends to retain its 501(c)(4) classification.
The specifics of the tax code can be confusing and the penalties for failing to abide by the appropriate laws and regulations can be very damaging to any organization with tax-exempt status. Seek the input of an experienced attorney if you have any questions or concerns pertaining to a social welfare group’s tax responsibilities.
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