The U.S. tax code and non profits

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The U.S. tax code makes special provision for non-profit groups which are, once approved by the Internal Revenue Service, exempt from paying income tax.

However, whether contributions by individuals can be claimed as a deduction against personal income tax depends on whether the organisation is registered as a non-profit group under section 501c(3) or 501c(4) of the tax code.

Contributions to a 501(c)(3) organization can be claimed against income tax but donations to a 501(c)(4) entity cannot. While 501(c)(3) groups - which range from religious organizations, traditional service provision charities through to advocacy organisations - are more attractive to individual donors, the tax code places restrictions on the amount of funds that can be spent on lobbying and bans funds being used on election campaigns. However, what constitutes lobbying - defined as urging a vote on legislation - and educational activities is one of gray zones that is constantly debated.

From a fundraising point of view it is much harder to raise money for a 501(c)(4) group, because individual donors cannot deduct the contributions from their taxable income. However, such organizations are free to spend as much of their funds as they like lobbying on legislation.

Often a non-profit groups will have two related entities - one a 501(c)(3) and another a 501(c)(4). Under the tax code provisions it is perfectly legal to transfer funds from a 501(c)(3) to a 501(c)(4)organisation. However, the restrictions on how funds are spent by the original 501(c)(3) carry over on the funds transferred to the 501(c)(4).

Conservative groups are increasingly stepping up on the pressure on groups they perceive as 'liberal' by claiming that the transfer of funds between 501(c)(3) and 501(c)(4)organisations is 'money laundering'. They have also complained to the IRS that groups involved in civil disobedience campaigns, such as Greenpeace, should be investigated.

These groups often argue that there needs to be greater 'transparency' for non-profit groups where a tax concession is granted by the public. The argument goes that since the public has foregone some tax they are entitled to ensure greater accountability and transparency in return.

While transparency and accountability are important, conservative groups advocating 'transparency' often display extra-ordinary double standards by not disclosing their own corporate donors. Most remain silent on the issue of disclosure of corporate donations to 501(c)(3)'s.

Some argue that corporate donations to a 501(c)(4) organization do not need to be disclosed since there has been no tax concession granted and therefore no public right to know.

While gifts from individuals to a 501(c)(4) non-profit group are not tax-deductible, it is not necessarily the same for companies. Companies can, for example, enter into a fee-for-service contract - such as a research consultancy - and claim it against taxable income. Alternatively contributions can be subsumed into a marketing, promotions or similar budget and claimed as a deduction against tax. In this way, a 501(c)(4) could indeed engage in a little "mooching off the taxpayer".

It's a way of doing business that is understood by the pro-hunting non-profit group, the U.S. Sportsmen's Alliance, which has both 501(c)3 and 501(c)(4) entities. "Contributions to the U.S. Sportsmen's Alliance, a 501(c)(4) organization, are not tax deductible unless you are in an outdoors related industry," it helpfully explains on its website.[1]

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