Sunday, March 18, 2018
Professor Ellen P. Aprill of Loyola Law School, Los Angeles has published an interesting op-ed in The Hill, arguing that the tax bill may cause an increase in the number of organizations that opt for 501(c)(4) social welfare status, rather than 501(c)(3) charity status. Donations to 501(c)(3) organizations are potentially tax deductible, but the organizations cannot engage in substantial lobbying or any campaigning. While donations to 501(c)(4) organizations are not deductible, the organizations can engage in substantial lobbying and at least some campaigning (arguably as much as 49% of their activities).
Aprill observes that the tax bill's increase in the standard deduction will significantly decrease the number of taxpayers who itemize. Because only itemizers benefit from the charitable contribution deduction, many commentators have observed that charitable giving may decrease significantly.
But Aprill observes that if non-itemizing taxpayers continue to give, they should also become indifferent between donating to 501(c)(3) charities and 501(c)(4) social welfare organizations. This may encourage more organizations to choose 501(c)(4) status, rather than 501(c)(3) status, especially because the choice would come with the ability to engage in considerably more political speech. In other words, the tax bill may (inadvertently?) lead to more 501(c)(4)s, more lobbying, and more campaigning.
It will be interesting to see how Aprill's observation plays out in practice. I can only imagine that at least some additional organizations will choose 501(c)(4) status. But there are benefits to 501(c)(3) status other than the charitable contribution deduction. Among other things, most foundations can only make grants to 501(c)(3) charities, and that is a larger source of funding for many organizations than individual donations.
UPDATE: Professor Aprill observes that private foundations can make grants to 501(c)(4) organizations by exercising expenditure responsibility, which is not necessarily a significant burden on the foundation or the use of its granted funds, so the benefits of 501(c)(3) status may be more limited than they appear at first glance.
Brian L. Frye