KVIG Informative

Section 501(c) of the tax code covers many kinds of tax-exempt organizations, but four dominate the headlines: charities, social welfare groups, labor unions, and trade associations. What separates them is mostly what they may say and do about politics, and who gets a tax break for supporting them.

The Congressional Research Service identifies four common types of 501(c) organization that carry explicit limits on political activity: charitable organizations under 501(c)(3), social welfare organizations under 501(c)(4), labor unions under 501(c)(5), and trade associations under 501(c)(6). Whether a group may lobby or take part in campaigns depends on which category it falls into, and a group that crosses its category’s line can lose its tax-exempt status.

The sharpest contrast is between the first two. According to CRS, a 501(c)(3) charity may not engage in any political campaign activity and may conduct only a limited amount of lobbying. Social welfare groups, unions, and trade associations may engage in campaign activity as long as it is not their primary activity, and they may lobby without a cap.

The Deduction Divide The categories differ on money as well. Donations to a 501(c)(3) are tax-deductible for the donor, while donations to a 501(c)(4) are not. The Supreme Court described that trade in its 1983 decision in Regan v. Taxation With Representation of Washington, a case brought by a group that wanted charity status and lobbying freedom at once. Congress, the Court said, had offered two routes: deductible gifts with limits on lobbying, or unlimited lobbying without the deduction. The group in that case had been formed to take over the work of two earlier nonprofits, one of each type.

How Lobbying Is Counted For charities, the law says no substantial part of their activity may be lobbying, a standard with no bright line. Most public charities can instead elect to be measured under section 501(h), which sets dollar limits tied to a share of exempt-purpose spending, with grassroots lobbying capped at a quarter of the direct-lobbying limit. Churches and private foundations cannot make that election. Spending above the limits triggers an excise tax.

What Each Group Reports Every 501(c) organization reports political activity to the IRS on Schedule C of Form 990 and substantial donors on Schedule B, according to CRS. Donor identities on Schedule B are generally not released to the public for most exempt groups, while the donor information filed by private foundations is public, as CRS has explained.

Where Churches and Foundations Fit Houses of worship and private foundations are usually treated as 501(c)(3) organizations too, which is why the charity rules reach them, along with conditions of their own. Private foundations face additional taxes and payout rules, covered later in this series.

How to Check Any Group The IRS’s Tax Exempt Organization Search shows which type of exemption a group holds and links to its filings. The type tells a reader what the group is allowed to do, which is the first step in judging what it is actually doing.