Overview
As the 2026 elections are approaching, tax-exempt organizations, particularly 501(c)(4) organizations, face an increasingly complex and uncertain federal and state regulatory environment.
501(c)(4) organizations are permitted to engage in lobbying, issue advocacy, partisan political activities, partisan get-out-the-vote (GOTV) efforts, endorse candidates, and support or oppose ballot initiatives. This flexibility makes 501(c)(4) organizations attractive vehicles during election years. But a 501(c)(4) organization engaging in too much political activity can lose its tax-exempt status.
Recent developments, including executive actions, court decisions, and state legislation, are reshaping the compliance landscape ahead of the 2026 election.
What can a 501(c)(4) do?
Under Internal Revenue Service (IRS) rules, a 501(c)(4) organization can engage in unlimited lobbying activity and limited political activity. To maintain its tax-exempt status, a 501(c)(4) organization cannot engage in excessive political activity and must operate "exclusively" to promote social welfare benefitting the public good. It is not allowed to be used as a vehicle to directly benefit any private shareholder or individual, or for a commercial purpose.
Treasury’s regulations interpret the word "exclusively" to mean "primarily" and rely on a facts and circumstances test. But the US Treasury and the IRS have not provided a brightline number for defining "primarily." The IRS has previously indicated that a 501(c)(4)'s political activities should not exceed 50 percent of the entity’s total activities. Others suggest a lower threshold is appropriate, such as 30 or 40 percent of total activities.
As 501(c)(4)s are not required to publicly disclose all donors, the critique is that these organizations are often used to fund political activity and shield the donors or worse, engage in such activity from sources that would otherwise be prohibited or disfavored, such as foreign national sources. As a result, some states have recently passed laws regulating tax-exempt organizations that receive foreign funding.
Federal Developments
501(c)(4) Organizations, Political Activity, and Exempt Status
Two recent federal court decisions have increased the uncertainty regarding 501(c)(4)s and allowable political activity to maintain its exempt status.
In September, the United States District Court for the District of Columbia in Freedom Path v. IRS held the IRS's longstanding political advocacy standard used to determine 501(c)(4) tax-exempt status as unconstitutionally vague. The IRS had denied Freedom Path 501(c)(4) tax-exempt status citing that it engaged in excessive political activity. In finding the standard unconstitutionally vague, the opinion emphasized the ambiguity surrounding how much political activity is permissible and what constitutes political activity. This ruling leaves the IRS in a strange impasse — due to an obscure longstanding appropriations rider, the IRS is prohibited from issuing or revising guidance related to this standard. While this decision only applies to Freedom Path, it opens the door to future constitutional challenges to tax-exempt regulations and uncertainty for those seeking 501(c)(4) status and those already engaged in political activity.
Last year, the Fifth Circuit affirmed in Memorial Hermann Accountable Care Organization v. Commissioner a US Tax Court ruling that Memorial Hermann did not qualify for 501(c)(4) tax-exempt status because it does not operate exclusively to promote social welfare and instead benefitted health care providers and insurers. Rather than considering the organization's primary purpose as set forth in Treasury's regulations, the Court considered the "substantial nonexempt purpose" test precedent set by the US Supreme Court in 1945 in Better Business Bureau of Washington, D.C. v. United States. The court, relying on its 2024 opinion lowering the deference afforded to agencies (Loper Bright, 603 U.S. 369), did not grant deference to the Treasury’s regulations and instead relied on a stricter standard.
Both cases create uncertainty for the acceptable levels of political activity that a 501(c)(4) can engage in while maintaining its social welfare purpose to meet its tax-exempt purpose.
Changes to Federal Regulatory Landscape: Investigations and Enforcement to Target Tax-Exempt Entities
In October, the Wall Street Journal reported that the Trump Administration sought to install allies of President Trump within the IRS Criminal Investigative Division (IRS-CI) to exert significant control over the division to pursue criminal inquiries of left-leaning groups and Democratic donors (Trump Team Plans IRS Overhaul to Enable Pursuit of Left-Leaning Groups, Wall Street Journal, October 15, 2025.). Before these reports, President Trump directed the IRS to "take action to ensure that no tax-exempt entities are directly or indirectly financing political violence or domestic terrorism" and refer these certain tax-exempt organizations to the Department of Justice for further investigation. And this follows the Trump Administration’s previous threats to revoke the tax-exempt status of Harvard and other universities (Harvard Signals it will Resist Trump’s Efforts to Revoke Tax-Exempt Status, The New York Times, May 2, 2025.).
The scope and intent of the Administration’s actions are unclear at this time. As a preventative measure, tax-exempt organizations should prepare for more audits, investigations, and enforcement actions by reviewing their compliance programs proactively.
State-Level Legislative Changes
State legislatures are also reshaping the compliance landscape, especially for any (c)(4) that receives financial support from abroad. This creates additional compliance challenges for multi-state organizations. Recent examples include:
- Florida: Effective July 1, 2025, Senate Bill 700 amends the Charitable Solicitation Act to prohibit registered tax-exempt organizations from soliciting or accepting contributions or "anything of value" from a "foreign source of concern," regardless of where the solicitation or acceptance occurs. This includes individuals, foreign governments, foreign political parties, agents, or entities from China, Russia, Iran, North Korea, Syria, Cuba, and Venezuela (under Nicolás Maduro). Violations can result in fines up to $10,000 and suspension or cancellation of the organization's solicitation license.
- Arkansas: Effective January 31, 2025, Arkansas's House Bill 1800 requires "foreign-supported political organizations" to register with the Arkansas Secretary of State. The law applies to any entity that has received anything of value from a "hostile foreign principal" within the past five years and engages in political activities. Covered foreign principals include individuals, governments, or political parties from China, Russia, North Korea, and Iran. "Political activity" includes anything from influencing an agency or public official to supporting or opposing a candidate for election.
- Connecticut: In 2024, Connecticut passed Senate Bill 253. It prohibits 501(c)(4) organizations that derive at least 20% of their income from foreign owners in the most recent taxable year from making contributions or expenditures related to candidate elections or ballot measures.
Compliance Moving Forward
With heightened federal scrutiny, ambiguous IRS standards, and new-state level restrictions, tax-exempt organizations should take proactive steps to mitigate potential exposure.
- Comprehensive Activity Review: Tax-exempt organizations should conduct a comprehensive review of all activities. This should include a central tracking and documenting system for activities undertaken by the organization. For 501(c)(4) organizations, particularly those involved in political activity, this includes reviewing budgets and expenditures to ensure the organization maintains its social welfare mission.
- Ensure a Firewall Between Organizations. 501(c)(4) organizations with related 501(c)(3) organizations should ensure all political and lobbying activities are separated and properly documented to respect the separate forms of each entity. This will help ensure the 501(c)(3) organization is not engaging in prohibited activities that could jeopardize its tax-exempt status. Entities sharing resources such as office space or employees should review and update any cost-sharing agreements to ensure all costs are properly allocated. And these same practices should apply to 501(c)(4) and 527 Super PAC Organizations with clear delineations between the two entities.
- Strengthen Internal Policies: Tax-exempt organizations should establish or update internal policies to reflect current federal and state requirements to ensure that funds are being used in compliance with their charitable purpose.
- Implement Training and Awareness: Organizations should train staff to understand the scope of permissible activities and the risks associated with impermissible activities.
- Segregation of Federal Funds: If an organization received federal funding, it should take care to segregate sources of funding used for lobbying activities from any federal funds it receives.
