I did a deeper dive into Section 501(c)(4) organizations and how companies become a social welfare tax-exempt company. To become a 501(c)(4), a company must first become a nonprofit at the state level. Once they obtain an EIN, they can fill out Form 8976 within 60 days and apply for 501(c)(4) tax-exempt status. They must also file Form 990 annually, indicating that they use the funds for social welfare or civic betterment, not private interest. A 501(c)(4) organization can then spend unlimited funds in the political environment.
Once they get their 501(c)(4) tax-exempt status, they can engage in political lobbying and influence public policy without any penalty. They just need to make sure 50% of it is categorized as social welfare. Because 501(c)(4) does not have to disclose its donors, corporations and rich individuals can anonymously fund their political beliefs. These donations can influence elections across the United States, yet nothing is done about them. These organizations can engage in political campaigns by spending unlimited money on political activities, with no one stopping them.
The only taxes that a 501(c)(4) organization pays are excise taxes on certain activities. Everything else is tax-exempt.
However, the problem with 501(c)(4) organizations is that only the company or individual is tax-exempt; donors are not. So, how do donors get away with not paying taxes on their donations? By establishing a section 501(c)(3). Section 501(c)(3) organizations are not allowed to donate to 501(c)(4) organizations directly, however, they can donate money to them through grants. A 501(c)(3) grant cannot fund a 501(c)(4) to use for political gain, but they can fund general 501(c)(4) activities.
For example, let’s say a C3 donates to a C4 get-out-the-vote activity, as long as it is not for supporting or opposing a candidate, the grant is valid. Basically, anything that is non-partisan can be given a grant. Climate change, childcare, and registering to vote are examples of how C3 can grant funds to C4 organizations and use them to run ads. As long as the grant informs the public and does not support a candidate or political group, the grants keep coming. Now the donors can write off the donations.
Another example is healthcare, which can also be a grant from a C3 to a C4, as long as it aligns with the mission of both organizations and the funds are not earmarked for lobbying or campaigns. Basically, as long as both organizations are doing the same social welfare work, a grant can be given.
Could this be how NGO’s are getting their money?
How the Rich Avoid Taxes using Section 501(c)(3)
Let’s take a more in-depth look at 501(c)(3) and how the rich get away with not paying Federal taxes. They set up a section 501(c)(3) foundation or trust to limit the federal taxes they pay and to pay themselves and their family through these foundations. It allows them to control their wealth while reducing or eliminating income, capital gains, and estate taxes.
While average investors pay taxes on the dividends they receive, billionaires often avoid paying taxes on the growth of their wealth by utilizing legal, structural loopholes that do not apply to regular income. They hold non-dividend-paying stocks and utilize specialized tax-exempt entities. One of the things they use is “BUY, BORROW, DIE.”
What is “BUY, BORROW, DIE.” Instead of taking cash dividends or selling stock and paying capital gains tax, they use the appreciated stocks to borrow money from banks. First, they BUY assets that will grow in value. Then they BORROW from the banks and take out low-interest loans against those assets to fund their lifestyle. By taking out a loan, the proceeds are not considered taxable income. DIE is when they pass; heirs inherit assets based on the fair market value at the time of death. Basically, allowing the heirs to pay little or no capital gains tax on the borrowed money.
By creating 501(c)(3) private foundations and charitable trusts, the rich can deduct their contributions from their income because these entities are tax-exempt. This allows them to avoid capital gains taxes while legally paying salaries to the foundation’s family members. They can also transfer assets into a trust, and, in return, reinvest 100% of the proceeds without paying taxes. A lot of billionaires have them: The Bill & Melinda Gates Foundation has funneled tens of billions of dollars while paying very little in taxes on that money over the years.
Jeff Bezos avoids taxes by keeping his Amazon salary low and getting most of his wealth from appreciating stock, which isn’t taxed until he sells it. By taking a low salary, he is eligible for more tax credits. He also uses BUY and BORROW and takes tax-free loans against his shares instead of cash. He also donates appreciated stock to charities to take a large tax deduction and further reduce his tax liability.
Elon Musk receives most of his compensation from his performance-based stock options and grants tied to the company’s performance. Therefore, he is not taking dividends and does not have to pay taxes. By leveraging performance-based stock options, he can defer paying taxes until he exercises those options. He can also donate stock, which allows him to avoid capital gains taxes and claim a tax deduction for the full market value, reducing his income and taxes.
Billionaires and even politicians talk about how the ultra-wealthy don’t pay their fair share. Why should they when they are following the tax code and can get away with it? It’s not that hard to fix, just change the tax code and get rid of the loopholes. Maybe set a limit on using capital gains to take out a loan or get rid of it altogether. Limit the amount of tax breaks to a certain percentage each year. Pay a minimum income tax, like everyone else who works and gets a W-2.
Unfortunately, those who work and get a W-2 cannot funnel money into a foundation or trust to avoid paying taxes. Yes, there are some tax breaks, 401 (k) s, healthcare spending, charity donations, etc., but nothing on the scale of the rich.
The politicians know what is going on with Section 501, so why don’t they do anything about it? What are they hiding? Only they know!