A Note on 501(c)4 Corporations

This whole notion that  501(c)4 groups are receiving some kind of huge implicit tax subsidy whose use needs to be policed is simply absurd.  I am a board member of several 501(c)6 trade associations, which have roughly the same taxation rules as 501(c)4.

The largest tax subsidy, by far, available to some non-profits is the deductibility of donations to the group.  This is available to 501(c)3 groups (traditional charitable organizations) but NOT to  501(c)4 or  501(c)6 groups.  Whether the Tea Party of Cincinnati is a  501(c)4 or not, you cannot deduct your donations to them.

The one tax break that  501(c)4 corporations get is that they do not pay taxes on any surplus they accumulate in a year.  In general, non profit groups like this collect donations and spend them.  So in general, their outlays match their revenues, such that they tend to show very little income anyway, even if it were taxable.  The only thing the non-profit status brings to  501(c)4 organizations is that they don't have to spend a lot of time and effort trying to make sure, at the end of the fiscal year, that expenditures and revenues exactly match.  Basically, the one benefit granted is that these groups can collect money in November for expenditure in January without paying taxes on this money.  This is hardly much of a subsidy, just a common sense provision.  (By the way, at least in a  501(c)6, there is no break from the paperwork.  We will have to pay an accountant to file a tax return for the Feds and the state of California.

This actually comes up from time to time in my industry.  A couple of my competitors are actually non-profits.  My for profit competitors always complain that these non-profits have an advantage, arguing that they are really for-profit, but just paying their "owners" large salaries rather than dividends.  My general answer is, so what?  My company is a subchapter S corporation, and it does not pay taxes either -- I pay taxes on the profits as regular income in my personal tax return, exactly as if I had paid out all the profits as salary.  Sure, it would be nice to accumulate profits in the company tax free, but seeing the shoe-string way my non-profits competitors run, I don't think that is what they are doing.  It used to be that as non-profits, they considered themselves immune to certain laws, like the Fair Labor Standards Act and minimum wage, but the courts have disabused them of that notion.  So it is hard to see what advantage they enjoy, but folks love to complain none-the-less.

The only real business advantage I have ever found these non-profits have is in perception among leftish politicians -- they are considered "clean" while as a for-profit company I am considered "dirty".  Which is why in California, early laws allowing outside companies to operate public parks allowed non-profits but not for-profits, and almost every state who goes this route tries non-profits first for the same reason.  This no longer bothers me -- anyone who had ever been part of a non-profit can probably guess the reason.  They really are not set up to operate a 24/7/265 service business, and within a year typically fall short, and I, with a bit of patience, then get my chance.

7 Comments

  1. jdgalt:

    If a company got most of its revenue from donations, I would think there'd be no point in having non-profit status since gifts are tax-free to anybody (unless it's over $13k, triggering gift tax to be paid by the giver).

  2. ErikTheRed:

    That seems to be a common complaint, especially around conservatives. If only they would step back, turn it around, and say that "well maybe the rest of us should get the advantageous treatment these people do (less paperwork, fewer taxes, etc)." There seems to be this ingrained tendency to place higher value on inflicting equal "punishment" rather than just saying "well why can't we just make it fair by getting rid of the punishment entirely"

  3. Ron H.:

    Indeed. we should congratulate anyone who are able to pay less in taxes for whatever reason.

    If a group of us was robbed at gunpoint, and someone managed to hide some of their valuables from the thieves, I don't believe we would demand that they give them up in the interest of equal treatment.

  4. HenryBowman419:

    It's not clear from news reports, which nearly always seems absent in, you know, actual information, whether the groups affected applied for 501c(3) or 501c(4) status. For all I know, many may have applied for 501c(3) status, which to me would not be an accurate designation.

    It seems to me that they should have applied for a 527 designation, which would be similar in many respects to a 501c(4), except that 527 are explicitly political. But, we don't know the facts.

  5. obloodyhell:

    }}} 24/7/265

    *2*65? :-D
    Wait wait....
    "What planet are you on?"
    LOLOLOLOLOL...

    ----------
    On the topic of non-profits:

    I can also note the local blood bank, which is a non-profit... THEY laundered the money in two ways -- one was the salaries of the officers -- but they also were constantly landscaping their place of business -- which looked quite nice all the time, btw -- but ... the work was done by a company which the CEO "just happened to be" a major owner of.... What a surprise... :-S

    That info is two decades old, the CEO has changed, but I'm willing to bet it's just been shifted around. They consistently run a surplus on blood, since it's a college town with a LOT of students as donors, even WITH a major teaching hospital nearby.

    What annoys me isn't so much that they do it, but that the alternative -- lowering the price of blood to the hospitals/recipients during a substantial surplus -- isn't ever anything to consider.

    And that's how the cost of health care endlessly rises... companies that COULD lower prices to deal with an excess of cash instead just find other ways to spend it, usually to the benefit of someone "large and in charge."

  6. HenryBowman419:

    It depends strongly upon whether the donations provided can be claimed as tax deductions for the ones who donate. If yes, there's a much greater liklihood that an organization will get more donations.

  7. jdgalt:

    501(c)3 status allows that deduction. 501(c)4 doesn't.

    The legitimacy of most 501(c)3 organizations has been controversial for years: if one defines "educational" to mean something like a school, then most of them should be revoked. But favoring one viewpoint over another is a whole 'nother matter, and may be both a First Amendment and an Equal Protection Clause violation.