Renner Nonprofit News, January 24, 2018
Joan M. Renner, CPA, CGMA, Shareholder, Renner and Company, CPA, P.C.
As a nonprofit leader, you want to make your voice heard to advance your mission. It might be as simple as going in front of City Council during budget hearings to encourage continued funding for your cause. You may urge your supporters to contact their State Delegate and voice their opinion about an upcoming bill. You may even have been one of the many individuals who weighed in on the new tax bill to preserve the charitable deduction.
As important as this kind of advocacy is, charities need to be careful about their actions in this area. If your charity’s actions amount to lobbying, you could incur big penalties or even endanger your tax exempt status. In today’s politically charged climate, it’s a good time to review some lobbying basics.
Don’t forget that the tax rules about lobbying are different for 501(c)(6) organizations. We’ll cover that in another article. Today we’re talking about 501(c)(3) lobbying.
What is lobbying? True lobbying has three elements. You’re lobbying if you:
- contact members of a legislative body, to
- propose, support or oppose
- a specific piece of legislation.
You’re also lobbying if you urge members of the general public to contact their legislators to do the same. Budget bills and funding bills are legislation. Activities at the federal, state and even the local level can all be considered lobbying.
How much lobbying can we do? Lobbying is perfectly legal and supported by IRS regulations, but there are limits in the law for 501(c)(3)s. Too much lobbying can lead to penalties and even loss of exempt status. To measure how much is too much, charities can choose between two sets of rules: either the “no substantial part test” or the “501(h) expenditure test”.
The no substantial part test applies to you if you haven’t made any special lobbying election. The tax code says that, to keep your exempt status, lobbying must be “no substantial part” of your overall activities. The trouble is that the tax code doesn’t define how much lobbying is too much. This test includes not only lobbying dollars for time and expenses, but also the efforts of volunteers. Court cases indicate that 5% may be ok but 20% may be too much. You’re really dealing with uncertainty if you are subject to this test.
The 501(h) expenditure test may be a good option if your activities will continue to involve some degree of lobbying. Once you file a one-time election using IRS form 5768, you use a formula to calculate an objective dollar limit that identifies how much lobbying is allowed. Only expenditures count, not volunteer efforts or in-kind donations.
What’s considered lobbying? There are two types of lobbying, direct lobbying and grassroots lobbying. Direct lobbying is where you go directly to the legislator or staff. Grassroots lobbying is where you communicate your view to the general public about specific legislation with a call to action, like “call your congressman” or “see the contact information of the key legislators below” or “go to our website for a draft message to your delegate” or even “your delegate is Jane Smith and she plans to vote no”. If you’re using the 501(h) expenditures test, only 25% of your calculated lobbying limit can be used for grassroots lobbying.
What if we lobby too much? The IRS can revoke your exempt status if they judge your lobbying to be a substantial part of your organization’s activities. If this happens, you will owe corporate income tax. Officers and directors who knowingly approved lobbying expenditures may also owe a 5% excise tax. If you filed the 501(h) election and exceeded the calculated limit, you must pay a 25% excise tax on the excess. You won’t lose your exemption though, as long as you didn’t go way over the limit for four years.
What’s not lobbying? You’re not lobbying if you’re: discussing broad policy issues, discussing pending legislation without taking sides, defending your organization to save its existence, answering legislators’ requests for information, communicating with regulatory bodies or communicating with your own members without a call to action.
There are a lot of details involved. This article is meant to introduce you to the basics. As always, consult your tax advisor to find out how the lobbying rules apply to your specific situation.
Find out more about nonprofit tax basics at our 501(c)(fit!) financial leadership training seminar for emerging nonprofit leaders.
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