What do schools, charities, religious organizations, and social welfare organizations have in common? They operate for the purpose of particular public interest, not to earn a profit. This distinct difference means their goals revolve around furthering the organization’s mission instead of financial gain.
There are millions of active nonprofit groups in the United States, and they focus on everything from little league baseball teams to cancer research facilities. And with the disruption that COVID-19 has caused, we can only expect this number to grow.
This blog will take a look at how the federal government categorizes nonprofit groups by statute, the advantages and restrictions of each, and how Rubino can help nonprofit groups.
According to the IRS, a 501(c)(3) is an organization that primarily operates in one of these categories:
Public safety testing
Fosters of amateur sport bouts
Prevention of children cruelty
Prevention of animal cruelty
What truly defines a 501(c)(3) organization is its mission. It has a dedicated goal that the members want to accomplish. It could be to provide homes for stray animals or to raise funds for cancer research. 501(c)(3) organizations are initially organized as a corporation, and then the entity applies for 501(c)(3) status through the IRS. Any contributions a donor makes to a 501(c)(3) organization are tax exempt.
The main advantage of a (c)(3) is tax exemption. While they’re still responsible for payroll taxes if they have employees (another reason why volunteers are preferred), tax exemption frees them from paying federal, state, and local income and sales taxes. It also provides some protection against lawsuits and the ability to receive grants from governments and private foundations.
501(c)(4) organizations are similar to 501(c)(3), but instead of a mission, these groups are associations joined by a similar function. A 501(c)(4) organization is referred to as a social welfare organization such as a rotary club, homeowner association, or a volunteer fire station.
Although contributions to a 501(c)(4) are not tax-deductible, these kinds of groups can engage in political and lobbying activity.
What’s the Difference Between a 501(c)(3) and 501(c)(4)?
The main differences between a (c)(3) and a (c)(4) organization are the level of political activity in which each organization can engage and whether donations are tax-deductible.
In a 501(c)(3), political activity is very restricted and cannot favor one party over another. Any political activity must relate to the purpose of the organization, and it can’t comprise more than 20 percent of the organization’s budget, which means that these organizations don’t normally participate in any political activity unless it directly relates to furthering their mission.
With a 501(c)(4), political activity and lobbying are much less restricted. They can campaign and support specific candidates who further the goals of their organization as long as they don’t give money directly to that candidate. They can spend up to 50 percent of their budget on lobbying and other political activities.
The other difference is in the ability to deduct donor contributions from taxes. Those who donate money to a 501(c)(3) can deduct their contributions on their taxes. Donations to a 501(c)(4) are not tax-deductible, although a business may be able to write the deductions off as a business expense.
527 organizations are primarily created for political goals such as the nomination, election, appointment, or defeat of candidates for a political office. The 527 organization definition from the IRS says they are exempt from federal taxes on contributions received, but there are strict rules they must follow for investment income. Donors are not restricted by any dollar amounts they contribute to a 527, but the organization is required to disclose the source and dollar amount of these donations.
We’re a trusted partner to many nonprofit organizations across the country. We assist them in developing their financial footing to have a solid foundation to carry out the vital work they do and to increase their organization’s value.
If you have a vision of a nonprofit group but are unsure where to start, reach out to Rubino. Let’s talk about it. While the road to establishing a nonprofit seems complicated, it always helps to have a trusted advisor to help you turn your vision into a reality.