A Brief Primer for Rotarians on 501(c)(3) and 501(c)(4) Organizations

May 1, 2019

A Brief Primer for Rotarians on 501(c)(3) and 501(c)(4) Organizations
 
As district treasurer, I often receive questions as to the tax deductibility of donations to Rotary clubs or our Rotary district. Questions vary but are similar to “Are donations to my club tax deductible as a charitable donation?” or “Are we (club or district) state sales tax-exempt?”
 
The correct answer(s) just depends. The answer in what distinguishes a 501(c)(4) non-profit Rotary club or Rotary district from a 501(c)(3) non-profit charitable organization, where donations are income tax-exempt for individuals, and purchases that can be state sales tax exempt, lies in federal tax regulations. Keep in mind that non-profit and charitable are not synonymous.
 
The 501 section of the federal tax code gives rise to various sub-section designations and is sub-divided according to rules established by the US Congress. The 501 section describes non-profit organizations that are tax-exempt from federal taxes, some of which may be state sales tax-exempt eligible. Charitable tax-exemption and state sales tax-free status is not automatic, but may be granted after application to the IRS and your state. State sales tax exemption exists for only 501(c)(3) organizations and may be granted upon filing an application with state authorities after first receiving favorable IRS notice of 501(c)(3) status.
 
501(c)(3) and 501(c)(4) organizations are similar in many respects. In fact, any organization that qualifies for a 501(c)(3) tax-exemption would also qualify as a 501(c)(4). There are, however, important differences.
 
Non-profit status:
• Both 501(c)(3)s and 501(c)(4)s must be run as not-for-profit
• Neither 501(c)(3)s nor 501(c)(4)s earnings may benefit a private shareholder or individual
 
Tax-exemption
• Both 501(c)(3) and 501(c)(4) organizations are exempt from paying federal income tax. State income tax-exemption varies by state
 
Charitable Donations:
• Donations to 501(c)(3)s are deductible to the full extent of the law
• Donations to 501(c)(4)s that are public entities (i.e., state or local government, and volunteer fire stations) may be deductible if they are used for public services. However, donations to other 501(c)(4)s, such as Rotary clubs, are not tax deductible as charitable donations. Advertising and the expense of club dues in support of their mission may be eligible as business expenses. Consult with your accountant.
 
State Sales Tax Exemption:
• Only 501(c)(3)s can be approved for state sales tax-exemption.
 
Rotary International has a 501(c)(4) tax filing status umbrella, which extends to all unincorporated Rotary clubs and districts. Furthermore, Rotary International files an annual IRS report, which lists all USA Rotary clubs. Our Rotary district, 7350, is incorporated as a 501(c)(4). Donations to Rotary clubs and districts, i.e., 501(c)(4) organizations, are not income tax-deductible to individuals, and these organizations are not eligible for state sales tax exemptions.
This is why a number of Rotary districts and Rotary clubs maintain a separate companion 501(c)(3) organization for fundraising (just like The Rotary Foundation) so as to maximize members’ “doing good in the world”.
 
If you are planning on doing limited or no lobbying and no campaigning, then you probably want a 501(c)(3) tax-exemption so that people can benefit from donating to your organization. If you want the best of both worlds, you may want two separate, but affiliated organizations – one a charitable 501(c)(3) and the other a 501(c)(4), both non-profit.
 
Ron Keyser, PDG, District Treasurer & Jef Bohn, CPA, Hagerstown Rotary Club