Navigating compliance as a 501(c)(4) tax-exempt organization

Here’s a helpful guide for these organizations, especially when it comes to political activity and lobbying.

Nonprofit leaders understand all too well that they have a profound duty when it comes to legal and ethical oversight of their organization’s activities. Congress’s chief tax-writing arm, the Committee on Ways and Means, recently announced it was evaluating current rules on political intervention and lobbying by tax-exempt groups — and that it would be ready to crack down on any violations of disclosure statements or expenditure limits.

For 501(c)(3) charitable organizations, the rules regarding political activity are clear: these nonprofits are prohibited from campaigning in support of or in opposition to any candidate for elective public office. But for 501(c)(4) groups, also known as social welfare organizations or local associations of employees, it’s not as clear-cut. These organizations may engage in political activity as long as it isn’t the organization’s primary activity — and in doing so, they may be subject to tax on political expenditures.

Navigating this complex web of compliance considerations is essential, yet can easily slip through the cracks when you’re focused on executing programs and advocating your mission.

As a tax accountant with 12 years advising nonprofits, I help my 501(c)(4) clients sort through key trouble spots as they prepare for their audits and tax season.  Here are 12 items that 501(c)(4) organizations must keep top of mind, based on the current regulations.

When it comes to political and lobbying activities, look out for:

• Political endorsements: 501(c)(4) organizations can endorse candidates financially and non-financially. There is no specific federal limit for political campaign contributions to political candidates. However, certain states may limit the dollar amounts contributed to political campaigns.
• Taxation on political activities: Political campaign activity expenditures that were incurred by the 501(c)(4) organization would trigger an 1120-POL filing requirement. A 501(c)(4) organization is required to file a Form 1120-POL if it has political organization taxable income under IRC Section 527(f)(1). Taxable income for these exempt organizations is the smaller of the net investment income of the organization for the tax year or the amount spent on an exempt function during the tax year—either directly or indirectly through another organization.
• Campaign intervention: Direct participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office should be limited. Excessive involvement in political campaigns can lead to the loss of tax-exempt status.
• Lobbying activities: 501(c)(3) organizations can engage in lobbying activities, but there are strict limits on the expenditures they can incur for lobbying. 501(c)(4) organizations do not have strict limits on how much they can incur in lobbying expenditures as long as it is not their primary focus.

When it’s time to file your Federal Form 990, be aware of:

• Conversion to a 501(c)(4) organization: A nonprofit organization that is exempt under any subsection of 501(c) that would like to convert to a 501(c)(4) organization can file the Form 8976 electronically on the IRS website, without having to file a Form 1024 in order to obtain 501(c)(4) status.
• Federal Unemployment Tax Act (FUTA): 501(c)(4) organizations are not exempt from paying FUTA tax with their payroll taxes. 501(c)(3) organizations are the only exempt organizations that are also exempt from this type of payroll tax.
• Related party transactions: If a 501(c)(3) organization lists a 501(c)(4)-related organization on Schedule R of its 990, it must report the dollar amount of the transaction if it exceeds $50,000 on Schedule R, Part V, of the 990, regardless of who the controlled or controlling organization is.
• Charitable contributions: Charitable contributions given to a 501(c)(4) organization are not tax-deductible to the donor. Additionally, if a 501(c)(4) organization is soliciting contributions, it is required by law to state in writing in every form of solicitation that contributions are not deductible as a charitable contribution.
• Reporting expenses: 501(c)(4) organizations do have to prepare the Statement of Functional Expenses on the 990 and must allocate expenses by program services, management & general, and fundraising functions.
• State regulations: 501(c)(4) organizations should be aware of and comply with state regulations, as they may vary. Some states have additional requirements for these types of organizations. This is common for 501(c)(4) organizations organized in California and New York. California imposes limits on political contribution campaigns, and both states have required financial disclosure reports if they incur above a certain dollar amount in political and lobbying expenditures.
• Membership dues revenue: If a 501(c)(4) organization receives membership dues, not only does the dues invoice given to the member have to state that the dues are not deductible as charitable contributions, but if the organization participates in lobbying activities, the organization must state what percentage of their dues goes toward lobbying as the portion of the dues that goes towards lobbying expenditures is not deductible to the member as a business expense.

Lastly, it’s important to keep in mind:

• Public perception: Since 501(c)(4) organization’s activities can appear to be charitable in nature, it is important to be mindful of public perception. Even though 501(c)(4) organizations are legally allowed to participate in controversial or highly partisan activities, such activities can impact public image and credibility.