Levers for Change: 501(c)(3)s and 501(c)(4)s

/

Donors today have access to a wide and exciting array of options for making a difference. But with those expanded options comes the need to understand their varying purposes, legal requirements and potential impacts on tax filings and public profile. Donors can weigh all of these factors alongside their philanthropic mission to determine which types of giving are the best fit. This brief offers an overview of different ways to give, including donating to 501(c)(3)s and 501(c)(4)s, political giving and impact investing. 

What’s the Difference Between c3 and c4 Nonprofits? 

501(c)(3) and 501(c)(4) organizations are tax-exempt, nonprofit organizations. It’s important to understand the difference when choosing where to make a contribution. 

  • 501(c)(3)s. These organizations are what most people think of when they think “nonprofit.” Most public charities, and all private foundations, are c3 organizations that engage in charitable activities, can receive tax-deductible donations and are limited when it comes to engaging in activities that might be considered political. 

  • 501(c)(4)s. These organizations include groups such as homeowners and employee associations, civic leagues, local fire departments and nonprofits that may engage in some political advocacy. They can engage in some political activities in support of their social-welfare mission, such as lobbying, endorsing or opposing candidates based on their positions on the c4’s mission, as long as political advocacy is not the organization’s primary activity. Donations are not tax-deductible. Additionally, c4s do not have to disclose donors’ names. 

Making an Impact Beyond Conventional Philanthropy

While conventional philanthropy ends at donating to 501(c)(3) or 501(c)(4) organizations, today’s donors are increasingly using additional strategies to make a difference on the issues that concern them, including impact investing and political giving. 

  • Impact Investing. Donors can complement their grantmaking or donations by also investing their assets in line with their philanthropic missions. For instance, a foundation might invest its endowment in socially responsible funds and/or make loans to nonprofits. An individual donor can do things like choose a socially responsible fund to invest the assets held in a DAF or directly invest in a socially beneficial business. These investments are not tax deductible and, as with all investments, there is some risk. But there is also strong potential to make a positive impact on issues. For more information, see our donor brief on impact investing. 

  • Political Giving. Another strategy for donors looking to go beyond traditional philanthropy is incorporating political donations into their giving portfolio. Individual donors can give directly to political campaigns, PACs and 501(c)(4)s. These options vary widely in donation limits, allowable activity and disclosure rules. Political giving is not tax deductible. Donors can learn more about candidates and electoral groups at Open Secrets, a nonprofit focused on transparency in political spending and donations. IP’s partner site, Blue Tent, has published a number of resources and recommendations about political giving for progressive donors.

Taking Action 

With so many options, donors can take their giving in many directions. So how should a funder decide which giving strategies to use? Here, we outline some of the considerations of experienced donors. You can also see our guides on giving for specific causes. 

  • Direct services, advocacy or both. Do you want your philanthropy to meet a need, change the conditions that create the need, or both? This question will help you decide whether to give to direct service organizations, which are usually 501(c)(3)s; advocacy organizations, which may be either c3s or c4s; or directly to candidates or electoral groups that could effect policy changes. Impact investing — for example, divesting from fossil fuels — is another way to address root causes and change conditions. All of this work is valuable, and donors increasingly fund a mix of direct services and advocacy.

  • What is needed most in a particular area. For every issue or community where you might want to make an impact, there are different priority strategies and ways of giving. For example, among nonprofits addressing gun violence, there are those dedicated to violence prevention or services for survivors, often 501(c)(3)s; and 501(c)(4)s and political groups that aim to change policy, research and more. Divesting from weapons companies is a common impact investing strategy. IP’s issue guides can help you learn more about which strategies are effective, well funded, or underfunded on issues you care about. 

  • Preference for anonymity or transparency. Some donors are glad to be publicly recognized for their contributions, and some prefer anonymity. Personal preferences and values around privacy, transparency and more come into play here. When choosing how to give, make sure you know if a given contribution can or cannot be anonymous and align your choices with your preferences. 

  • Tax deductibility. For many, tax benefits are an incentive to be charitable. If tax deductibility is a priority, giving to 501(c)(3) organizations will be the way to go. On the other hand, a donor whose larger priority is making a big impact on a particular issue might be comfortable making non-tax-deductible contributions to 501(c)(4)s and other organizations that have more flexibility to engage in advocacy or politics. Some organizations offer both options. For example, the youth climate group Sunrise Movement operates the 501(c)(4) Sunrise Movement as well as a 501(c)(3), the Sunrise Movement Education Fund, and the Sunrise PAC. Donors can choose which entities to give to.

Have suggestions for improving this brief? Please email us at editor@insidephilanthropy.com.