November 26, 2022

If your past few weeks have been anything like mine, you’ve been on the receiving end of mailers, phone calls, and texts advising you to get out and vote. There’s a lot on the ballot, from state and local elections to the federal midterms.

Most of the election information I’ve received has been from the candidates themselves. But what happens when election-related activities come from other organizations, including those that are tax-exempt?

We tend to lump tax-exempt organizations together as though they are all the same thing, but they’re not. And sometimes, the distinction matters.

Tax-Exempt Organizations

Organizations described in Section 501(c) of the tax code are exempt from income taxes at the federal level. For statutory purposes, there are 27 different kinds of these entities. They can be incredibly detailed, such as certain teachers’ retirement fund associations detailed in Section 501(c)(11) and co-op health insurance issuers noted in Section 501(c)(29). However, the Section 501(c) organizations that are most recognizable are those found in subsections (3) and (4).

Section 501(c)(3)

501(c)(3) organizations are what you and I think of as charities. That’s because they’re described in the tax code as entities “organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition … or for the prevention of cruelty to children or animals.” Those typically include hospitals, churches, schools, and charities such as World Central Kitchen or the American Red Cross, which provide services for those in need.

Section 501(c)(4)

In comparison, 501(c)(4) organizations are “[c]ivic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees.” That includes groups such as the AARP and the ACLU and may include homeowners associations and volunteer fire companies.

Tax Deductibility

Section 501(c)(3) organizations are tax-exempt for federal income tax purposes, though payroll, sales, and other taxes may still apply. Most significantly, donations are deductible as charitable contributions for federal income tax purposes.

Section 501(c)(4) organizations are also tax-exempt for federal income tax purposes. However, donations are not deductible as charitable contributions for federal income tax purposes. Why not? Different rules apply—and one of the most significant has to do with politics.

Political Involvement

Section 501(c)(3) organizations are prohibited from participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office—that language appears directly in the statute. The IRS has confirmed that contributions to political campaign funds or public statements of position in favor of or opposition to any candidate for public office are violations of this rule. This includes comments and links on websites, podcasts, broadcasts, and any printed materials.

Other activities are fact and circumstance dependent. For example, certain voter education activities such as holding public forums and making voter education guides available are okay so long as they are nonpartisan. Efforts to encourage people to participate in the electoral process, such as voter registration and get-out-the-vote drives, would similarly not be prohibited—again, if they are conducted in a nonpartisan manner.

Voters cast their ballots on Election Day, Nov. 4, 2008, at Centreville High School in Clifton, Va.

Photographer: PAUL J. RICHARDS/AFP via Getty Images

Speeches

The same general rules apply to speeches. If an organization invites a candidate to speak in their capacity as a political candidate, the organization must offer an equal opportunity to participate to all political candidates seeking the same office. The organization must be careful not to indicate any support for or opposition to any candidate, including candidate introductions and communications concerning any candidate’s attendance. And, of course, there must be no political fundraising at any entity events.

If an organization invites a candidate to speak in a non-candidate capacity, it needs to be careful to make clear that the individual is chosen to speak solely for reasons other than candidacy for public office and that the individual speaks only in a non-candidate capacity. The latter is important. According to the IRS, that means neither the candidate nor the organization can mention the individual’s candidacy or the election. The atmosphere at the event must remain nonpartisan.

Issue Advocacy

It’s a little more tricky when it comes to issues. A 501(c)(3) organization may take positions on public policy issues—including potentially divisive ones like abortion and tax policy. However, any policy statements should not break the other rules, including the appearance of favoring or opposing a candidate. But be careful—a statement doesn’t have to use a candidate’s name or likeness to be considered prohibited political campaign activity. The wording of a policy statement can still imply an endorsement, which is not allowed.

Finally, a 501(c)(3) organization may not make a contribution to a political organization described in Section 527, including a candidate committee, political party committee, or political action committee.

In contrast, 501(c)(4) organizations may engage in lobbying as long as it pertains to the organization’s mission. Additionally, any partisan political activity, including spending money on a candidate, is allowed to the extent it’s not the primary purpose of the organization.

Rule Breaking

What happens if the organization breaks the rules? Violations may result in denial or revocation of tax-exempt status, and the organization may be subject to an excise tax on the amount of money spent on the banned activity.

Charitable and Political Purposes

Charitable organizations need to stay in their lane or risk losing status. However, sometimes an organization may have more than one mission or purpose—maybe they provide a bona fide charitable service but want to engage in public advocacy or politicking. In that case, they must create a separate entity. That’s why an entity organized as a 501(c)(4) organization may have a related entity under Section 501(c)(3). Pay attention when making donations or seeking information since many have similar-sounding names—often, it’s as simple as the word “Foundation” tacked onto the name.

Do Your Homework

If you need clarification on an organization’s status, ask. Most entities note on their materials, including their website, what kind of 501(c) organization they are and whether donations are tax deductible for federal income tax purposes. You can also check the status of many organizations by using the online search tool on the IRS website—keep in mind the tool will only search for organizations with 501(c)(3) status.

If you know the location of an organization’s headquarters, you can search the IRS Organizations Business Master File Extract for information about the group’s subsection, deductibility, and status.

This is a regular column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.

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