Previously, we looked at the difference between issue advocacy (which is permissible for non-profit organizations) and lobbying (which becomes problematic for a 501(c)(3) if it is “substantial”). So what is your non-profit organization to do if it decides that the best way to advance the mission is to influence legislation? This is where other types of tax-exempt status come into play.
Non-Profit Doesn’t JUST Mean 501(c)(3)
501(c) is actually a reference to the section of the tax code that permits certain organizations to apply for and be granted tax-exempt status. The code actually contains 29 different sub-sections that can be used to apply for tax exemption. But when most people say non-profit or charity, they are referring to Section 501(c)(3). And while a c(3) organization cannot engage in substantial lobbying, other types of organizations can. These commonly include organizations that have been granted tax-exemption under Sections 501(c)(4) or (6).
A 501(c)(4) is a non-profit organization operated exclusively to promote social welfare. To be operated exclusively to promote social welfare, an organization must operate primarily to further the common good and general welfare of the people of the community. And 501(c)(6) includes organizations like business leagues, chambers of commerce, trade associations, and, oddly enough, professional football leagues. These types of organizations generally group together members who have some common business interest for the purpose of promoting that shared interest. But 501(c)(6) organizations cannot themselves engage in a regular business activity for a profit.
Lobbying is considered a permissible method of attaining social welfare purposes (for c(4) organizations) or promoting a common business purpose (for c(6) organizations). Not only that, lobbying can even be the organization’s primary activity without jeopardizing its tax-exempt status.
These organization can even engage in political campaigns on behalf of or in opposition to political candidates as long as the political campaigning does not constitute the organization’s primary activity. However, any amounts the organization spends for political activities may be subject to tax, including any funds spent influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any federal, state or local public office or office in a political organization.
Setting Up A Related Organization
Because of these nuances, non-profit organizations that want to exert more influence on legislative bodies often form affiliated organizations that have their own tax-exemption under 501(c)(4). Of course, these can also be standalone entities, and 501(c)(6) organizations are often in the opposite situation—desiring to create a 501(c)(3) to pursue charitable dollars.
So how does an existing 501(c)(3) go about creating a related organization to engage in lobbying? First, the new entity must be created at the state level by filing Articles of Incorporation with the Secretary of State. Within 60 days of filing with the state, the entity must also file Form 8976 (Notice of Intent to Operate Under Section 501(c)(4)) with the IRS. In addition, the organization should apply for tax-exempt status just like any other non-profit organization. However, 501(c)(4) organizations use Form 1024-A rather than the more common Form 1023 that c(3) organizations use.
Other Practical Matters
Like any 501(c) organization, the new c(4) entity will need its own bylaws, board of directors, tax ID number, and bank account. And it will need to file the appropriate Form 990 each year. In the case of affiliated organizations, the two organizations need to take steps to maintain their identity as separate entities. While there can be some overlap between the boards of directors for the two organizations, less is certainly better. And any overlap should certainly be less than 50% of the board. The two organizations should have separate board meetings and separate committee meetings (to the extent committees are necessary).
Transactions between the two organizations should also be arms-length transactions, meaning they should be at fair market value and on similar terms as would be expected if the two organizations were not related. In particular, there should be written agreements covering any resource sharing (i.e., office space, employees, goods or services, the licensing of any intellectual property, mailing list and equipment sharing or rentals, etc.) And a majority of the disinterested (i.e., non-overlapping) directors should approve these transactions.
Finally, any fundraising solicitations from the c(4) entity must disclose in an express statement in a conspicuous and easily recognizable format that contributions to the c(4) are not deductible for federal income tax purposes as charitable contributions.
It’s critical that your non-profit understand the differences between issue advocacy, legislative lobbying, and political campaigning before you do anything that could jeopardize your tax-exempt status. If you have questions about your organization’s planned activities or need assistance creating a separate entity, then schedule a consultation today.