501(h): Peace of Mind for Nonprofit Lobbying
It may come as a surprise to you that nonprofit organizations can participate in lobbying activities. There are, however, limits to how much time and money the organization can spend on lobbying activities. Read this article to learn more about the framework of IRS limitations on organizations’ lobbying activities, including whether or not making a 501(h) election would be beneficial for your organization.
The IRS will take away an organization’s tax-exempt status if the organization spends a substantial amount of time and money lobbying. Lobbying means an attempt to influence legislation, often through lobbying contacts. An organization engages in lobbying contacts whenever it communicates with government officials about legislation, rules, or policies. Lobbying also encompasses the time an organization spends preparing and planning for lobbying contacts, whether it be through creating written materials, holding meetings, or urging the public to take a particular stance on a political matter.
As mentioned above, the IRS does not prohibit an organization from lobbying, it just restricts how much of it the organization can engage in. The IRS gives organizations a choice as to how it will measure the organization’s lobbying activities, it will do so either under the 1) the “substantial part” test or under 2) Section 501(h) of the tax code.
Substantial Part Test
Generally, an organization may lobby and retain its tax-exempt status unless a substantial part of the organization’s activities are spent lobbying. So what constitutes a “substantial part” of an organization’s activities? Well that’s where it gets fuzzy. The IRS decides whether an organization substantially engages in lobbying activities by weighing the “facts and circumstances.” Thus, under this test, it’s difficult for organizations to predict how the IRS will view its activities, and whether or not it may lose its tax-exempt status.
Aside from its unpredictability, another major risk under this test is that those organizations that do in fact lose their tax exempt status for engaging in substantial lobbying must also pay a 5% excise tax on all lobbying expenses. In fact, officers and directors must also personally pay a 5% tax if they willfully or unreasonably authorized the lobbying activities.
501(h) Election – Expenditure Test
Don’t worry, there’s another option. An organization can elect for the IRS to measure its lobbying activities under 501(h) and the “Expenditure Test” by filing a Form 5768. By taking this election, organizations are given specific dollar limits on how much money they can spend on lobbying. The amount of funds allowed will depend on the size of the organization and its total tax-exempt budget. Under Section 501(h), a nonprofit may spend 20% of its first $500,000 of its tax-exempt budget to lobby. The amount permitted increases after the first $500,000. No organization may spend $1 million or more on lobbying activities.
Overall, making the 501(h) election provides huge benefits—mainly, organizations may enjoy peace of mind from the risk of losing tax exempt status.
- 5 Legal Tips Every Nonprofit Should Know
- How To Keep Your Tax Exempt Status: Pt. 1
- How To Keep Your Tax Exempt Status: Pt. 2
Disclaimer: Although this article may be considered advertising under applicable law and ethical rules, the information in this article is presented for informational purposes only. Nothing herein should be taken as legal advice and this content does not form an attorney-client relationship. If you would like further information, Wilkinson Mazzeo would love to hear from you, so please feel free to reach out with any questions!
Photo Credit: Jackie Wonders