Sample Agreement: Allocation of Costs and Reimbursement of Expenses Between 501(c)(3) and 501(c)(4)

Allocation agreement between 501(c)(3) and 501(c)(4) organizations.

A 501(c)(3) and 501(c)(4) may share employees, equipment, and office space. In fact, the entire staff of the 501(c)(4) could be employees of the 501(c)(3) or vice versa. It is essential, however, that the 501(c)(4) pay at least its full share of all salary, equipment costs, and rent for running the day-to-day operations of the 501(c)(4) in order to ensure that the 501(c)(3) does not subsidize the 501(c)(4).

These costs should be paid regularly and within a reasonable time. While there is no clear IRS guidance on what is reasonable, a 501(c)(4) should reimburse a 501(c)(3), generally within 30 to 60 days, for any advanced costs, such as salaries or rent. The flow of funds from a 501(c)(4) to a 501(c)(3) does not result in any significant legal risk, but a 501(c)(3) could jeopardize its tax-exempt status if it subsidizes or pays the expenses of the 501(c)(4).