Lobbying and grassroots advocacy are great ways to further your mission and have a broader impact, but the amount of lobbying a 501(c)(3) nonprofit organization can do is limited by IRS regulations. It is important for nonprofit administrators to be aware of what those limits are, especially since the penalties for exceeding those limits can be stiff.
Read on to find out more, but be forewarned - because of the detailed nature of the subject, this is a longer than usual post.
What is Lobbying?
According to the IRS, lobbying is attempting to influence legislation. The formal definition of legislation is:
"Legislation includes action by Congress, any state legislature, any local council, or similar governing body, with respect to acts, bills, resolutions, or similar items (such as legislative confirmation of appointive office), or by the public in referendum, ballot initiative, constitutional amendment, or similar procedure. It does not include actions by executive, judicial, or administrative bodies.
An organization will be regarded as attempting to influence legislation if it contacts, or urges the public to contact, members or employees of a legislative body for the purpose of proposing, supporting, or opposing legislation, or if the organization advocates the adoption or rejection of legislation.
Organizations may, however, involve themselves in issues of public policy without the activity being considered as lobbying. For example, organizations may conduct educational meetings, prepare and distribute educational materials, or otherwise consider public policy issues in an educational manner without jeopardizing their tax-exempt status."
How Much is Too Much?
The IRS uses two different tests to calculate permissible levels of lobbying and advocacy.
They are:
1. Substantial (or insubstantial) Part Test. This is the default test that applies to most 501(c)(3) nonprofit organizations. The Substantial Part Test limits the amount of a non-profit’s time and expenditures for lobbying to an “insubstantial” part of the organization’s overall activities. This includes both time - volunteer time and paid time - and expenditures including all costs of researching, preparing, planning, drafting, reviewing, copying, publishing, and mailing a direct or grassroots lobbying communication - including amounts paid as current or deferred compensation for employees' services attributable to these activities. In addition, the allocable portion of administrative, overhead and other general expenses attributable to these activities also must be treated as lobbying expenditures.
But the IRS has provided no specific guidance on how much lobbying is considered substantial, saying only that it "is determined on the basis of all the pertinent facts and circumstances in each case."
Nolo.com's legal research team reviewed a few court decisions that may offer some guidance to nonprofits. One court found that a nonprofit’s lobbying was not substantial because it constituted less than five percent of the organization’s total time and effort for the year. Another court found that lobbying was substantial where it exceeded 16% of a nonprofit’s total expenditures.
Many people use these figures as a rule of thumb— assuming spending anything less than five per cent of the nonprofit’s total budget is minor lobbying, while spending anything over the 16% to 20% range is substantial lobbying.
In addition to providing no guidance on how much lobbying is considered substantial, IRS guidance as to what constitutes lobbying under the insubstantial part test is vague as well. The insubstantial part test defines lobbying as “carrying on propaganda, or otherwise attempting to influence legislation” and includes any communication that “contacts, or urges the public to contact, members of a legislative body for the purpose of proposing, supporting, or opposing legislation or advocates for the adoption or rejection of legislation.”
2. 501(h) Expenditure Test. The 501(h) Expenditure Test and related rules were enacted by Congress specifically to relieve the uncertainty of the Substantial Part Test. The 501(h) test sets firm limits on the amount of money that can be spent on lobbying activities and that amount is based on the size of the organization.
Under this test, most organizations will feel they can engage in more lobbying by electing to measure their lobbying under Section 501(h) of the Internal Revenue Code. For instance, nonprofits with expenses of less than $500,000 each year, may devote up to 20% of their expenses to lobbying related activities. Nonprofits whose annual expenses are between $500,000 and $1,000,000 can spend $100,000 a year plus 15% of their total expenses over $500,000.
According to the Alliance for Justice, this includes grassroots lobbying (such as urging the general public to communicate the organization’s position on legislation to legislators) or direct lobbying (such as telling legislators or their staff to support or oppose legislation or urging the organization’s members to do so).
Organizations electing to use the expenditure test must file Form 5768 PDF, Election/Revocation of Election by an Eligible IRC Section 501(c)(3) Organization to Make Expenditures to Influence Legislation, at any time during the tax year for which it is to be effective. The election remains in effect for succeeding years unless it is revoked by the organization.
A 501(c)(3) charitable nonprofit organization taking the 501(h) election remains a 501(c)(3) charitable nonprofit. The (h) election merely allows the nonprofit to opt out of the uncertainty of the “substantial” activity test and use the expenditure test.
Penalties
According to the IRS, exceeding the limits of the Substantial Part Test can result in a
501(c)(3) nonprofit organization losing its tax-exempt status, resulting in all its income being subject to tax. "In addition, section 501(c)(3) organizations that lose their tax-exempt status due to excessive lobbying, are subject to an excise tax equal to five percent of their lobbying expenditures for the year in which they cease to qualify for exemption. Further, a tax equal to five percent of the lobbying expenditures for the year may be imposed against organization managers, jointly and severally, who agree to the making of such expenditures knowing that the expenditures would likely result in the loss of tax-exempt status."
Exceeding the limits of the 501(h) Expenditure Test in just one particular year, may result in an excise tax penalty equal to 25 percent of the excess. Should the organization exceed its lobbying expenditure dollar limit over a four-year period, it may lose its tax-exempt status, making all its income for that period subject to tax.
Conclusion
In my opinion, it may be best to not lobby as a nonprofit at all. But for those who want to do so and whose mission requires it for success, it would be wise to consider a 501(h) election.
Making the 501(h) Election can maximize your organization’s lobbying limit, lower your audit risk, allow your organization to take advantage numerous exceptions provided under the 501(h) rules for what is considered lobbying, and allow for an exclusion for lobbying time "donated" by volunteers (including board members). Further, penalties under 501(h) for excessive lobbying in a single year allow for financial (tax) penalties rather than the immediate loss of tax exemption by calling for loss of tax-exemption only if an organization has exceeded their limits for four years.
If a 501(c)(3) wishes to engage in even more lobbying than is permitted under either the 501(h) expenditure test or the insubstantial part test, the organization may wish to consider creating an affiliated 501(c)(4) organization, which can engage in an unlimited amount of lobbying. The downside to a 501(c)(4), of course, is that donations generally are not deductible as charitable contributions for federal income tax purposes.
Please note: The information contained in this fact sheet and any attachments is being provided for informational purposes only and not as part of an attorney-client relationship. The information is not a substitute for expert legal, tax, or other professional advice tailored to your specific circumstances, and may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code.
Comments