Organizations exempt under 501(c)(3), or nonprofits, are often and understandably nervous about lobbying, namely how related expenses could impact their tax-exempt status. Without a solid grasp on which activities equate to lobbying and how much in terms of dollars is allowable, many nonprofits forego lobbying altogether for fear of running afoul of IRS regulations. The irony is that nonprofits, who are in a unique position to rally constituents and effect change in public policy, are the very organizations that should be advocating for the public good. However, all charities, both electing and nonelecting, are prohibited from intervening in a political campaign.
Fortunately, the 501(h) election can help manage the risks associated with nonprofit lobbying, as the election clearly defines lobbying activities and how much a nonprofit can spend on them. The election is open to most nonprofits (although churches and private foundations do not qualify) and can be taken any time within the taxable year in which the lobbying occurs, simply by filing Form 5768 with the IRS.
There is a cap of $1 million on lobbying expenditures, which may not be helpful for very large nonprofits but is more than generous for most organizations. The limits follow a sliding scale based on the amount of exempt-purpose expenditures. For example, if a nonprofit spends $100,000 on exempt purposes (all expenditures excluding certain fundraising, capital, unrelated business and investment management expenses), it can spend up to $20,000 on lobbying with up to $5,000 of that amount on grassroots lobbying. Also important to note, there is no limit on lobbying activities for which the nonprofit does not pay, such as lobbying conducted by volunteers.
Besides clarifying how much an electing nonprofit can spend on lobbying, the 501(h) election also defines what types of activities constitute lobbying. For electing nonprofits, the following definitions apply:
Direct lobbying is communication made to either a legislator or an employee of a legislative body, or any other government employee who may participate in the formulation of the legislation. Communication refers to a specific piece of legislation and reflects a view on it.
Grass roots lobbying is an attempt to influence specific legislation by encouraging the public (other than members of the nonprofit) to contact legislators about the legislation. Communications must refer to specific legislation, reflect a view and encourage the recipient to take action.
Private foundations may make general support grants to nonprofits that lobby — as long as the funds are not set aside for lobbying purposes.
Community foundations may make these grants too, as well as specifically earmark a grant for lobbying, as long as it treats this money as lobbying expenditures of its own and follows the same limits as other nonprofits.
One caveat, nonprofits that receive federal funds may not use those funds for either direct or grass roots lobbying.
Electing nonprofits also have a wider margin of error regarding excessive lobbying expenditures. Non-electing nonprofits that overspend can potentially lose their exempt status that same year. Electing nonprofits that spend in excess of their limit will pay a tax of 25% of the excess, but, have a rolling four-year period before they would potentially lose exempt status.
If your organization decides to make this election, be sure to keep good records of lobbying expenditures and monitor the amount spent against the cap. And when it’s time to prepare your 990, let your tax preparer know so the appropriate section of the return can be completed. The election stays in place until revoked, which is easily done by filing the same form with the IRS. The revocation will be effective for the following tax year.
Please contact a member of your service team, or contact Marie Brilmyer at email@example.com for further discussion.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.