Under the Internal Revenue Service Code qualifying non-profit organizations are exempt from paying federal income tax. To receive a classification under one of these code sections, an application must be submitted to the IRS with an abundance of information pertaining to the organization. The application process can be tedious and lengthy, so it is important to apply under the appropriate code section.
501(c)(3) organizations are public charities, private foundations, or private operating foundations with open membership. These are organizations formed for charitable, religious, scientific, literary, or educational purposes. Organizations with 501(c)(3) status are eligible to receive tax-deductible contributions.
501(c)(4) organizations are those formed and operated to promote social welfare, such as civic leagues or local associations of employees with limited memberships. These are organizations that benefit the common good, rather than primarily benefiting a private group of citizens. This classification is recommended if the organization seeks to engage in unlimited lobbying or campaign efforts, because 501(c)(3) organizations are not permitted to engage in political activity unless they notify the IRS of limited lobbying efforts. Donations to a 501(c)(4) are not tax deductible as charitable contributions.
Is it possible to have both classifications?
Yes. It is possible to have two separate but affiliated organizations. One would be a charitable organization under 501(c)(3) and the other a 501(c)(4) for political activities of the organization. An example of this is Planned Parenthood. The Planned Parenthood Federation of America is a 501(c)(3). There are Planned Parenthood affiliates across California formed as local non-partisan 501(c)(4) organizations, and as part of their political efforts, they were able to produce voter guides to assist with the 2012 elections.
Talk to your professional advisors before determining which classification is right for your organization. The IRS itself has identified that there is considerable overlap between these two classifications, and many organizations could qualify for exempt status under either code section.