Non-profit corporations that participate in lobbying can often affect change that advances their mission. However, many non-profits are uncertain about the legality of lobbying or its potential impact on their tax-exempt status.
Partisan political activity on behalf of or opposed to a candidate for public office is strictly prohibited and can result in loss of tax-exempt status. However, lobbying is allowed. There is an important distinction between “lobbying” and “partisan political activity.” Understanding that distinction, as well as the laws governing lobbying activity, is critical to any 501(c)(3) that conducts public policy campaigns, grassroots advocacy, or legislative initiatives.
Under federal tax law, a 501(c)(3) organization can lobby without facing tax consequences so long as it does not devote a “substantial part” of its total activities to lobbying. As an alternative to the somewhat ambiguous and subjective “substantial part” test, federal tax laws allow nonprofit entities to opt for a 501(h) election, which provides clear, objective guidelines for 501(c)(3) organizations.
What Is lobbying?
Under IRS regulations, “lobbying” is defined as any communication that addresses specific legislation or a proposal that may be introduced as legislation. “Legislation” is defined as action by a federal, state or local legislative body or, in the case of a ballot issue initiative or referendum, the public. Courts and administrative or executive agencies are not considered legislative bodies. IRS regulations define two types of lobbying communications: direct and grassroots. Direct lobbying reflects a view on specific legislation. Grassroots lobbying reflects a view on specific legislation, and also encourages the audience to take some action, like contacting a legislator or government official about the formulation of the legislation.
What Is Not Lobbying?
A great deal of advocacy is not defined as “lobbying” under the IRS regulations. If the communication is not targeted to a specific proposed legislative decision, or it does not encourage citizens to urge their legislators to take specific action, then it likely is not lobbying. The IRS regulations include specific exemptions for communications that are not considered to be lobbying including: providing a nonpartisan analysis, study, or research, providing testimony or advice to a legislative body in response to a written request from the chair of that body, “self-defense communications” regarding legislation which would affect the organization’s existence, powers, duties, tax-exempt status, or the deductibility of contributions, discussing broad social or economic issues, without mentioning specific legislation, and general, educational communications with an organization’s members regarding legislation, so long as the communication does not encourage members to take action regarding the legislation.
IRS Restrictions on Lobbying by Non-Profit Organizations.
501(c)(3) organizations are prohibited from lobbying “except to an insubstantial degree.” The IRS applies two different rules, or tests, to determine if lobbying is “substantial.” The insubstantiality rule has existed in the IRS Code since 1934 and simply states that “no substantial part of a charity’s activities . . . be carrying on propaganda or otherwise attempting to influence legislation.” “Substantial” is not further defined and is determined on a case-by-case basis.
In applying the “insubstantiality” test, the IRS looks at all the facts and circumstances of an organization’s lobbying activities to determine whether these are “insubstantial.” The test measures all aspects of an organization’s lobbying, including the work of volunteers. This rule is vague and subjective and has been applied in the past to find even a small percentage of lobbying activity to be “substantial.” Non-profit organizations that rely on the insubstantiality test should keep lobbying activity to a minimum.
501(c)(3) organizations that want to engage in more that a de minimus amount of lobbying may want to consider a 501(h) election. Section 501(h) of the Internal Revenue Code provides an alternative test for acceptable amounts of lobbying activity and outlines a more definitive and objective test for measuring a 501(c)(3) organization’s lobbying expenditures. Also called the “expenditure test” or the “20% rule,” 501(h) establishes specific dollar limits that are calculated as a percentage of a charity’s total tax-exempt budget.
Benefits of 501(h) Election
Electing 501(h) status has a number of advantages over relying on the insubstantiality rule. Perhaps most important are a set of clear guidelines and regulations to define the lobbying activities of non-profit organizations and foundations making grants to those organizations. Electing 501(h) status permits the organization to lobby within well-defined parameters, rather than worry about subjective application of the insubstantiality test. The 501(h) test can also allow for greater amounts of lobbying activity and places no limit on lobbying activities that do not require expenditures, such as volunteer activity.
The penalties under 501(h) are also less severe. The IRS may only revoke exempt status from an organization that elects 501(h) status if the organization exceeds lobbying limits by at least 50% averaged over a four-year period. A non-electing organization could lose its exemption for a single year’s excessive lobbying. And, unlike a non-electing organization, there is no personal penalty for individual managers of an electing organization that exceed its lobbying expenditures limits.
Electing 501(h) status is accomplished by filing Form 5768, “Election/Revocation of Election by an Eligible 501(c)(3) Organization to Make Expenditures to Influence Legislation.” The single-page form calls for the organization’s name, address, and first tax year to which the election will apply. The election can be revoked and reinstated easily and at any time.
501(c)(3) organizations may engage in lobbying activity and often find it beneficial to do so. Charitable organizations that wish to engage in lobbying activity should carefully consider electing 501(h) status. Doing so will give the organization more certainty and flexibility in its lobbying activities. A professional accountant or tax advisor should be consulted to assist with these issues.
Both state and federal law require that any person or organization that engages in lobbying activity must register and file periodic activity reports apart from any tax filings that are due. Lobbying laws differ considerably from tax laws using different definitions of lobbying and distinct reporting requirements. Any charitable organization that engages in lobbying activity should be prepared to comply with both the tax laws and the state or federal registration and reporting requirements that govern lobbyists.