June 16, 2016

Case study

Think Tanks and Tax Status: A note on the 501(c)3 and 501(c)4 Tax Categories

[Editor’s note: This post has been drawn from a section in a paper written by Alek Chance from the Institute for China-America Studies: Think Tanks in the United States: Activities, Agendas, and Influence]

In order to understand the activities of US non-governmental organizations, it is helpful to take a look at the US tax code. The tax status of a non-governmental organization helps to define its character. This is because this status defines legal parameters and creates public expectations regarding the activities an organization can legitimately engage in. These parameters are delimited by Congress and regulated by the Internal Revenue Service (IRS).


Most think tanks in the United States are registered as non-profit organizations under section 501(c)3 of the US tax code. This status confers significant benefits but also comes with many limits regarding political activities. Some organizations have decided to move parts of their operations out of this tax status in order to more directly engage in lobbying and advocacy activities.

Want to learn more about think tanks business models?

Think tank business models: The business of academia and politics

The deliberative think tank: a function or an entirely new model?

For-profit think tanks and implications for funders

Unravelling the business models of think tanks in Latin America and Indonesia

501(c)3 is the most common status for non-profit organizations in the United States. These organizations, in addition to being not-for-profit, must be charitable, religious, educational, seeking to prevent cruelty to animals or children or provide similar public goods. Among the innumerable examples of such organizations are colleges and universities, environmental groups, clubs, public health services, community sports programs and more. These organizations do not pay federal taxes, and more significantly, contributions to them are tax-deductible for the donors. This means that the US government indirectly subsidizes these non-profit organizations by reducing the tax burden of donors.

A second important feature of the 501(c)3 status is that donations to organizations with this classification are not required to disclose their donors. Most think tanks typically disclose donors, both in annual reports and, if applicable, within the publications that they have funded. +However, there are many exceptions, and disclosures often lack detail. Some organizations controversially use the 501(c)3 status to disguise various agendas, effectively dressing up lobbying organizations as think tanks.

Along with these benefits come certain restrictions. Most significantly, 501(c)3 organizations are prohibited from engaging in “political campaign intervention.” This means that, among other restrictions, they cannot contribute funds to particular candidates or parties and they cannot lobby directly for particular electoral outcomes, although the regulations on lobbying for particular issues are complex.+If hosting a campaigning politician, a 501(c)3 organization must give equal opportunity to opposing candidates to speak. These limitations, while not always clear, and subject to evolving standards of implementation, help to define a sphere of independent and non-partisan activity among think tanks. In fact, most traditional think tanks have historically separated themselves from electoral politics and even legislative politics more than is required by the restrictions imposed by their tax classification.


However, there has been a trend on the part of some think tanks to more directly influence the US political process and advocate particular ideological or partisan viewpoints. These organizations may find the 501(c)3 category too restrictive. Both Heritage and the Center for American Progress have set up parallel organizations under the 501(c)4 category in order to engage more directly in electoral politics and pursue particular legislative outcomes. Under this status, organizations classified as “social welfare or community benefit organizations” are allowed to contribute money to political candidates so long as their “primary purpose” is a social welfare or community benefit issue.+

Classifying the “primary purpose” of an organization is somewhat subjective, and recent IRS adjudications of certain groups’ statuses have been controversial. However, most organizations adhere to a model of ostensibly spending no more than 49.9% of their revenues on political campaign intervention in order to maintain the 501(c)4 status. 501(c)4 organizations are tax-exempt, but their donors receive no tax deduction from the IRS. Donors to 501(c)4 organizations may for the time-being remain anonymous, although this may soon change nationally—it already has in some states. The system of regulation for political campaign donations has been upended by the far-reaching and controversial Citizens United case in the Supreme Court, and the IRS, Congress, and state governments are still adapting regulations and implementing legislation accordingly.+

Heritage and CAP use the 501(c)4 status to directly engage in the US electoral system. They spend money on supporting candidates, public outreach and advertising, and grassroots organizing. ThinkProgress.org, a news blog associated with the Center for American Progress, is part of its 501(c)4 “Action Fund.”

501(c)4 organizations have come under scrutiny in the United States given the lack of transparency associated with their funding and expenditures. Critics complain that the current regulatory framework too readily allows corporate interests or even in some cases single individuals to disguise their lobbying efforts as social welfare organizations. By moving some of their activities into this tax category, some think tanks associate their agendas with a realm of campaign financing and issue advocacy that most Americans are justifiably suspicious of. Some observers have also doubted the degree to which organizations like CAP and Heritage can truly separate their activities from their affiliated “action funds.”+

Finally, even if think tanks can establish an effective wall between themselves and their lobbying and advocacy counterparts, the very fact that Heritage and CAP created “sister” 501(c)4 organizations in the first place underscores in the eyes of some the partisan intent of the original organizations.+

Read more from: Alek Chance