There appears to be a lot of liberal outrage aimed at conservative and tea party groups for applying for a tax-exempt 501(c)(4) status. If the critics knew more about nonprofit tax designations—and cared more about IRS employees undermining free-speech freedoms—they might realize that their outrage is misplaced.
There is a fundamental difference between a 501(c)(3) and 501(c)(4) designation, the latter being the status sought by most of the targeted groups. Both are nonprofits, which means the organizations do not pay taxes on profits. (Incidentally, if a for-profit business doesn’t make any profit in a given year, it too is likely to avoid paying income taxes.)
Perhaps the biggest difference between the two is that contributions to a (c)(3) (which is how they are abbreviated) are tax deductible while contributions to a (c)(4) are not. As such, the federal scrutiny of (c)(3)s is much more stringent, and appropriately so. The idea has been that we do not want to subsidize, through tax breaks, partisan political activity.
But to repeat: While some (c)(4)s do engage in both educational and political activity, their contributors do not get a tax break for doing so.
The (c)(4)s, like all 501(c) organizations, often get one tax advantage: Depending on state law, they might not have to pay sales tax on items or services that they purchase, though doing so requires proof of nonprofit status. Of course, for-profit businesses also escape sales taxes when purchasing certain goods and services, and any sales taxes they do pay come off their bottom line as business expenses.
The (c)(4)s are allowed to be involved in politics, as long as their purpose is social welfare and not, say, the targeting of a particular candidate. Indeed, one pundit wondered why the various groups didn’t just stay unincorporated and never apply for a (c)(4) designation.
As IPI President Tom Giovanetti has pointed out, if a group is raising money—through donations or bake sales and the like—it needs a bank account for depositing money and writing checks. The bank will want a tax number before opening the account, and the only way to do that is by incorporating and getting a designation from the IRS.
If groups are forming into organized bodies to educate the public about the Constitution or President Obama’s disastrous economic policies, they need a tax ID, and a 501(c)(4) may be the best fit. The lesson to be learned in this debate is that free speech, not the tax code, is what is really under attack.
May 21, 2013