What is Lobbying?
“Lobbying” is defined as carrying on propaganda, or otherwise attempting to influence pending or proposed legislation. Attempting to influence legislation includes contacting, or urging members of the public to contact, members or employees of a legislative body to propose, support, or oppose legislation, and advocating for the adoption or rejection of legislation.
Most 501(c)(3) organizations (which we will call “nonprofits”) may engage in this activity, including supporting legislation, within limits. However, nonprofits may not devote a substantial amount of their activities to lobbying. However, even if a nonprofit does engage in lobbying within legally permissible limits, the lobbying activity must further the nonprofit’s tax-exempt purpose (i.e., its mission).
“Legislation” includes action by the U.S. Congress, any state legislature, any local council, or similar governing bodies, concerning acts, bills, resolutions, or similar items (such as legislative confirmation of appointive office), or by the public in a referendum, ballot initiative, constitutional amendment, or similar procedure. It does not include actions by executive, judicial, or administrative bodies.
Keep in mind that the IRS does not consider all legislation-related activities as lobbying. For instance, nonprofits may be able to conduct educational meetings, prepare and distribute educational materials, or otherwise educate the public regarding public policy issues without supporting or opposing specific legislation. Additionally, communications that discuss only broad principles, as opposed to specific legislation, generally do not count as lobbying and would not jeopardize their tax-exempt status.
What is Considered a Substantial Amount of Lobbying as a Nonprofit?
The IRS has not precisely defined “substantial.” This lack of clarity creates uncertainty for nonprofits that engage in lobbying activity. In determining what is substantial, the IRS will look at several factors including, but not limited to, the amount of time a nonprofit devotes to lobbying (including volunteer time) and the amount of funds it expends on lobbying activity. Devoting more than 5-10% of a nonprofit’s activities, including expenditures, to lobbying would likely be considered substantial.
If a nonprofit engages in a substantial amount of this political activity, the IRS will impose excise taxes (i.e., penalties) on the nonprofit’s expenditures related to its lobbying activity. Moreover, in egregious cases, the IRS may revoke the nonprofit’s tax-exempt status.
To avoid these potential penalties, nonprofits must carefully monitor lobbying activity and expenditures to ensure they remain within safe limits. Nonprofits can also remove the uncertainty of determining what is substantial by making what is known as a 501(h) election.
What is a 501(h) Election?
As an alternative to the multi-factored “substantial amount” test, nonprofits can elect to be bound by an objective test that focuses exclusively on expenditures pursuant to Section 501(h) of the Internal Revenue Code. This election is made by filing IRS Form 5768.
Under the 501(h) “expenditure test,” lobbying expenditures are permissible so long as they do not exceed permitted levels based upon a percentage of a nonprofit’s total exempt-purpose expenditures. Generally, allowable expenditures range between 5-20% of a nonprofit’s exempt-purpose expenditures, not to exceed $1M in total. Exempt-purpose expenditures are amounts paid to accomplish a nonprofit’s tax-exempt purpose.
If your nonprofit intends to engage in any amount, it should first consult with an attorney to determine if it can and should make a 501(h) election and for guidance on how to ensure its activity stays within allowable limits.
There are a variety of reasons why your nonprofit may or may not want to make the 501(h) election. Determining factors include the size of your nonprofit and the different disclosure requirements that are created by making the 501(h) election. Be sure to consult with an attorney before making this decision.
Public Charity vs. Private Foundation – The Difference with Lobbying
Above we mentioned that most nonprofits may engage in lobbying activity, within limits. That is because private foundations (as opposed to public charities) may not engage in any lobbying activity. A private foundation will face the imposition of excise taxes and risk losing its tax-exempt status if it engages in any lobbying activity.
For more information on private foundations, see our recent blog here.