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What are the tax implications for a non-profit 501?

June 6, 2021 Federal Criminal Attorneys

What are the tax implications for a non-profit 501?

The answer depends on whether the organization is a 501(c)(3) public charity or a 501(c)(4) social welfare organization. The IRS Web site has a chart of the main differences between the two.

The main difference is that public charities, which include churches, religious organizations, schools, hospitals and community groups, are eligible for a range of tax breaks, including the ability to receive tax-deductible donations. However, social welfare organizations, which include advocacy groups, can engage in political activity but are not eligible for the same tax breaks as public charities.

The two not-for-profit types are also subject to different disclosure requirements.

When the IRS evaluates whether an organization qualifies for tax-exempt status, it examines whether the organization’s activities are consistent with the IRS’ definition of charity, which includes the promotion of social welfare. The IRS also looks for an organization’s primary purpose to be the “dissemination of ideas” rather than the making of a profit.

The IRS Web site has a long list of the types of activities that do not qualify for tax-exempt status, including business activities, supporting or opposing candidates for public office, paying excessive compensation to officers, lobbying and manufacturing or selling products.

In addition, the IRS examines whether an organization’s purposes and activities are insubstantial.

The IRS says that an organization with a primary purpose of influencing legislation, and that spends more than half of its time on such activities, is not tax-exempt.

The IRS has an online questionnaire for organizations that are applying for tax-exempt status.

Determining whether a candidate is truly a “social welfare” organization is difficult, because the IRS has not issued clear guidance on the issue.

“They were sort of hamstrung by Congress, which said they couldn’t get involved in that kind of stuff,” said William P. Barrett, a tax law professor at George Washington University Law School, referring to the IRS’ inability to establish clear rules for social welfare organizations. “The IRS has sort of backed off trying to define it.”

The IRS Web site gives a number of examples of what is and is not considered social welfare activity. For instance, a social welfare organization may try to influence legislation, but it may not attempt to influence legislation that affects only a special interest, as opposed to the general public.

The need for greater clarity on social welfare organizations was highlighted last month, when the IRS sent letters to about 300 social welfare groups that had applied for tax-exempt status, asking them to provide additional information on their activities. The IRS later clarified that the letters were sent to groups that had been classified as social welfare organizations and that had not filed forms 990-T, which social welfare groups use to report income from unrelated business activities.

“This is the first time we’ve ever sent these kinds of letters to people,” IRS Commissioner Doug Shulman said during an interview on C-SPAN’s “Newsmakers.” “We’re trying to be very clear that we are not targeting any particular group. We’re trying to make sure we have the right set of facts.”

The IRS has been criticized in the past for its treatment of some organizations seeking tax-exempt status.

After the agency denied the tax-exempt status of the National Rifle Association in 1995, the NRA sued the IRS, saying that the IRS used a “secret political test” to deny the group’s application. The case was settled in 1999.



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