A social welfare organization is a nonprofit organization exempt under Code Section 501(c)(4). It is similar to a 501(c)(3) organization in that its income is generally exempt from tax and is subject to the same limits on private inurement and excessive payments to insiders.
It is different, however, in that contributions to it are not deductible as charitable contributions and it is able to conduct unlimited lobbying activities.
Section 501(c)(4) exempts:
- nonprofit civic organizations operated exclusively for the promotion of social welfare; and
- local associations of employees whose earnings are devoted to charitable, educational, or recreational purposes.
The Code does not define social welfare, however, the regulations equate social welfare with the common good and general welfare and civic bettering and social improvements. The primary purpose of a social welfare organization’s purpose must be to benefit the community or society as a whole, not just the organization’s members and their families or other select individuals.
For example, IRS accepted community purposes include rehabilitation and job placement of members; and, promoting legal rights of a segment of society.
What a Social Welfare Organization Is Not
The primary activity of a social welfare organization cannot be to “carry on a business with the general public in a manner similar to organizations which are operated for profit.” Even so, a profit-making business may be carried out as an incidental part of the organization’s activities.
Social welfare organizations cannot be operated primarily as “a social club for the benefit, pleasure, or recreation of its members.” The organization can, however, conduct social functions for the benefit of members if they are incidental to the organization’s primary purposes.
IRC §501(c)(4) “shall not apply to an entity unless no part of the net earnings of such entity inures to the benefit of any private shareholder or individual.” Prohibited inurement results when the private interests of persons with a financial stake in the activities of an organization are furthered.
Inurement is most likely to be found when the benefitted persons are organization insiders (officers, directors, or employees) who exercise either control or substantial influence over the organization’s revenue production or its disbursements.
Any amount of private inurement is grounds for revoking the exempt status of an organization. The harshness of this action has been somewhat mitigated IRC Sec. 4958, which allows the IRS to impose a fine in cases of inurement rather than revoking exempt status.
Tax on Excess Benefit Transactions
Social welfare organizations are subject to the prohibition on excess benefit transactions. An excess benefit transaction is any transaction in which an economic benefit is provided by an organization directly or indirectly to or for the use of any disqualified person if the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit.
An excess benefit transaction includes any transaction in which the amount of any economic benefit provided to or for the use of a disqualified person is determined in whole or in part by the organization’s revenues and results in any private inurement. A “disqualified person” includes:
- any person who was (within the last 5 years) in a position to exercise substantial influence over the affairs of the organization;
- a member of the family of an individual described in the preceding paragraph; and
- a corporation, partnership, trust, or estate of which 35% is owned or controlled by persons described above.
A social welfare organization may devote a substantial part of its activities to lobbying purposes. Lobbying means carrying on propaganda or otherwise attempting to influence legislation. Lobbying also includes urging individuals to contact their legislators to propose, support, or oppose the legislation.
In contrast, a §501(c)(3) organization cannot engage in substantial lobbying activities, or else it will forfeit its tax-exempt status. Many §501(c)(3) organizations form affiliated social welfare organizations to take advantage of this key difference.
Political Campaigning Activities
A social welfare organization may participate in lawful political campaign activities involving the nomination or election of public officials without adversely affecting its exempt status, provided such activities are insubstantial in relation to its overall activities.
Campaign activity includes participation or intervention in any political campaign on behalf of, or in opposition to, any candidate for public office. A candidate is any contestant for elective office.
Political campaign activities relate to individual candidates, whereas lobbying activities relate to social issues and laws. Participation in a campaign includes publishing or distributing statements made either by a candidate or by someone else directed at a candidate.
However, the amounts expended for such activities may be treated as political organization taxable income under IRC §527(b). In contrast, a §501(c)(3) organization is absolutely prohibited from engaging in any political campaigning activities whatsoever, or else it will forfeit its tax-exempt status.
Deductibility of Membership Dues
Any social welfare organization must, when membership dues are assessed or paid, notify members of the portion of dues allocable to lobbying and political campaign activities. This portion of membership dues is not deductible. See IRC §162(e) and §6033.
If a social welfare organization fails to give its members this notice, it will be taxed on the amount of dues allocable to lobbying and political campaign activities at the highest corporate tax rate. These requirements do not apply in the case where membership dues are not otherwise deductible by members.
Further, these requirements will not apply to a §501(c)(4) organization if either
- the largest amount of annual dues paid by any member is $50 or less; or
- greater than 90 percent of its members are tax exempt charities (§501(c)(3) organizations).
The largest amount of annual membership dues will be treated as $50 or less if the amount of membership dues in excess of $50 is not more than 10 percent of the total amount of annual dues paid by all members.
Related Post: Big Changes in Social Welfare Organizations
IRC § 501(c)(4) status can be somewhat easier to obtain and is obtained by filing Form 1024 which is simpler to complete than the Form 1023 required to obtain 501(c)(3) status. Form 1024 can be accessed here: http://www.irs.gov/pub/irs-pdf/f1024.pdf. For organizations that wish to do good work but don’t necessarily need to fundraise, forming a social welfare organization is a great alternative to 501(c)(3) status.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.