By Dr. Merrill Matthews
Texas Insider Report: Dallas Texas There appears to be a lot of
liberal outrage aimed at conservative and Tea Party groups for applying for a tax-exempt 501(c)(4) status. If the critics knew more about nonprofit tax designations and cared more about
IRS employees undermining free-speech freedoms they might realize
that their outrage is misplaced.
There is a fundamental difference between a 501(c)(3) and 501(c)(4) designation the latter being the status sought by most of the targeted groups. Both are nonprofits which means the organizations do not pay taxes on profits. (Incidentally if a for-profit business doesnt make any profit in a given year it too is likely to avoid paying income taxes.)
Perhaps the biggest difference between the two is that contributions to a (c)(3) (which is how they are abbreviated) are tax deductible while contributions to a (c)(4) are not. As such the federal scrutiny of (c)(3)s is much more stringent and appropriately so. The idea has been that we do not want to subsidize through tax breaks partisan political activity.
But to repeat: While some (c)(4)s do engage in both educational and political activity their contributors do not get a tax break for doing so.
The (c)(4)s like all 501(c) organizations often get one tax advantage: Depending on state law they might not have to pay sales tax on items or services that they purchase though doing so requires proof of nonprofit status. Of course for-profit businesses also escape sales taxes when purchasing certain goods and services and any sales taxes they do pay come off their bottom line as business expenses.
The (c)(4)s are allowed to be involved in politics as long as their purpose is social welfare and not say the targeting of a particular candidate. Indeed one pundit wondered why the various groups didnt just stay unincorporated and never apply for a (c)(4) designation.
As IPI President Tom Giovanetti has pointed out if a group is raising money through donations or bake sales and the like it needs a bank account for depositing money and writing checks. The bank will want a tax number before opening the account and the only way to do that is by incorporating and getting a designation from the IRS.
If groups are forming into organized bodies to educate the public about the Constitution or President Obamas disastrous economic policies they need a tax ID and a 501(c)(4) may be the best fit.
The lesson to be learned in this debate is that free speech not the tax code is what is really under attack.
Dr. Merrill Matthews is a Resident Scholar at the Institute for Policy Innovation (IPI) in Dallas Texas. He is available for interview by contacting Erin Humiston at (972) 874-5139 or erin@ipi.org.
