501c3 vs 501c4: What’s the Difference?

Oct 21, 2023 

Disclaimer: Although we don’t provide financial advice, we can assist you with your filings and corporate documents and help you apply for 501(c)(3) status under the Internal Revenue Code (IRC). You can find more information about the services we provide at Pearl Solutions here

Overview of 501(c)(3) and 501(c)(4) Organizations

If you’re in the process of creating your own nonprofit or mission-driven organization, you’ve likely come across the terms 501c3 and 501c4. You may have also seen those terms written as 501(c)(3) and 501(c)(4). 

But do you know what those terms refer to? And do you know how they’re different? 

You’ve got so much to take care of at this stage in the nonprofit development and creation process—do you really need to get into this right now? 

You do if you want to apply for tax-exempt status* and identify as a tax-exempt organization in the eyes of the Internal Revenue Service** (IRS)

To put it another way: Do you want to be able to tell your donors that their donations to your organization are tax-deductible? If so, you need to get familiar with these terms.  

In general, 501(c)(3) and 501(c)(4) are used as a way to categorize organizations and explain their tax-exempt status. For example, you might see an organization described as a 501(c)(3) organization or as having 501(c)(3) status. 

However, it’s important to know that the 501(c)(3) and 501(c)(4) designations actually correspond to sections of the Internal Revenue Code (IRC). These sections—sections 501(c)(3) and 501(c)(4)—provide information about tax-exempt organizations like charities and nonprofits

If you’re overwhelmed with all of this information, we get it. That’s why we put this post together. 

Keep reading for a quick look at what you need to know about 501(c)(3) vs 501(c)(4) organizations and exemption requirements. 

What is 501(c)(3)?

As mentioned above, 501(c)(3) refers to section 501(c)(3) of the IRC. You may also see this used in contexts like 501(c)(3) organization or 501(c)(3) status. 

This is what the IRS says about 501(c)(3) organizations:

“To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.”

One benefit of having 501(c)(3) status is that you can tell individual donors that their donations will be tax-deductible. This could encourage more people to donate to your organization or encourage donors to give more than they have in the past.

You can learn more about how the IRS defines publicly-supported charitable organizations, applying for 501(c)(3) status, and more on the IRS website.

What is 501(c)(4)?

The 501(c)(4) designation refers to section 501(c)(4) of the IRC. 

Here’s what the IRS says about organizations exempt under section 501(c)(4):

“Internal Revenue Code section 501(c)(4) provides for the exemption of two very different types of organizations with their own distinct qualification requirements. They are:

Social welfare organizations: Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, and

Local associations of employees, the membership of which is limited to the employees of a designated person(s) in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational or recreational purposes.

Homeowners associations and volunteer fire companies may be recognized as exempt as social welfare organizations if they meet the requirements for exemption. Organizations that engage in substantial lobbying activities sometimes also are classified as social welfare organizations.”

What are the Differences Between 501(c)(3) and 501(c)(4) Organizations?

Ultimately, you’re the one who decides which type of status best suits your organization and your mission. Before applying, you need to carefully consider the type of organization you’re forming, the organization’s activities, and its exempt purposes.

Here’s a look at what you’ll have to consider and an overview of a few differences between 501(c)(3) and 501(c)(4) organizations. 

Tax-Exempt Status

501(c)(3): Organizations that meet the requirements laid out in this section are considered tax-exempt organizations. With rare exceptions, donations to these organizations are tax-deductible. 501(c)(3) organizations must disclose donor information when the donation amount meets a certain threshold. 

501(c)(4): Organizations that meet the requirements laid out in this section are also considered tax-exempt organizations. However, donations to these organizations are not usually tax-deductible. 501(c)(4) organizations do not generally have to disclose donor information. 

Primary Activities and Exempt Purposes

501(c)(3): According to the IRS, the exempt purposes in this section are: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.

501(c)(4): As for these organizations: They must be operated exclusively to promote social welfare. They must not be organized for profit.

Educational Purposes

501(c)(3): Tax-exempt organizations that exist for educational purposes usually gain that tax-exempt status under section 501(c)(3) because one of the purposes is “educational.” 

501(c)(4): This is one of those areas where things can get a little confusing. Although organizations formed for educational purposes usually apply for tax-exempt status under section 501(c)(3), there are a few exceptions.  For example, if a tax-exempt social welfare organization conducts some educational activities, it would still likely qualify under section 501(c)(4), not section 501(c)(3).  

Charitable Purposes

501(c)(3): In general, if you see an organization described as a charitable organization, it is likely referring to an organization with 501(c)(3) status. Learn how the IRS defines “charitable” here

501(c)(4): Although we may think of some activities as charitable activities, what matters is how the IRS categorizes an organization, its activities, and its exempt purposes. As mentioned above, most charitable organizations—as defined by the IRS—are 501(c)(3) organizations. 

Social Welfare Purposes

501(c)(3): 501(c)(3) organizations cannot be considered action organizations. Because social welfare organizations can fall into the category of action organizations, they usually qualify under section 501(c)(4).

501(c)(4): Social welfare organizations may qualify for exemption under this section. According to the IRS, the organization must operate “primarily to further the common good and general welfare of the people of the community (such as by bringing about civic betterment and social improvements).”

Political Advocacy and Lobbying Activities

501(c)(3): These organizations are restricted in the political and lobbying activities they can conduct. You can learn more here.

501(c)(4): Organizations with this status have more flexibility when it comes to lobbying. Learn more about social welfare or action organizations

Business Expenses

501(c)(3): As mentioned above, donations to most 501(c)(3) organizations are tax-deductible. However, there are several factors that inform whether or not a charitable donation can be considered a business expense. Additionally, there are usually limits on the amount of charitable contributions taxpayers can deduct.  

501(c)(4): Although donations made to 501(c)(4) organizations are not usually tax-deductible, the IRS states that they “may be deductible as trade or business expenses, if ordinary and necessary in the conduct of the taxpayer’s business.”

Types of Organizations Eligible for Each Status

501(c)(3): The exempt purposes for these organizations are: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.  Organizations with 501(c)(3) status include St. Jude Children’s Research Hospital, the American Society for the Prevention of Cruelty to Animals, and Girls on the Run. 

501(c)(4): You can find examples of social welfare organizations here. Organizations with 501(c)(4) status include AARP (formerly known as the American Association of Retired Persons) and the American Civil Liberties Union. 

To learn more, visit the IRS resource page for charities and nonprofits.

If you’re looking to start a mission-driven organization, we’d love to hear from you. Our team can assist you with your filings and corporate documents and help you apply for 501(c)(3) status under the IRC. You can learn more about the nonprofit creation and development services we provide at Pearl Solutions here

*Keep in mind that you’ll apply for tax-exempt status after you’ve determined the type of organization you want to create, gathered your documents, and taken care of other activities.

**The IRC is overseen by the Internal Revenue Service, which is a bureau of the Department of the Treasury that operates as a tax administrator.

If you’re looking to apply for and win a world-changing grant, we’d love to support you. Learn more about the grant proposal writing services we provide at Pearl Solutions.