When we hear the word lobbying, we picture lobbyists representing a national organization, contacting members of Congress to discuss an upcoming bill that affects their industry. However, organizations who do not engage in lobbying very often may be unsure about whether some of their actions represent lobbying or whether they are allowed to lobby. Consider the CEO of a social services organization who addresses City Council during budget hearings to request continued funding for his or her cause. What about the organization that urges its supporters to contact their State Delegates and tell them to support an upcoming bill? These organizations might be surprised to hear that their actions represent lobbying, and too much lobbying could lead to substantial penalties or even cost them their tax exempt status.
What is Lobbying?
An organization is lobbying (attempting to influence legislation) if it contacts members of a legislative body to propose, support, or oppose legislation, or if it advocates the adoption or rejection of legislation. Lobbying also includes urging members of the general public to contact legislators to propose, support, or oppose legislation. Legislation includes budget and funding bills. Activities at the federal, state, or even the local level can all be considered lobbying.
Can 501(c)(3) Organizations Engage in Lobbying? If So, How Much Lobbying Can They Do?
Lobbying is perfectly legal and supported by IRS regulations, but nonprofits granted tax exemption under IRC Section 501(c)(3) do have limitations. Too much lobbying can lead to penalties and even loss of exempt status. To measure how much lobbying is too much, 501 (c)(3) organizations can choose between two sets of guidelines: the “No Substantial Part” Test, or the 501 (h) Expenditure Test.
No Substantial Part Test
To maintain tax exempt status, lobbying must be “no substantial part” of a 501(c)(3) organization’s overall activities. This test evaluates not only the level of lobbying expenditures, but also the time spent by employees, volunteers, and board members, and more. Under this test, there is no statutory or regulatory definition as to how much lobbying is too much. Facts and circumstances determine whether lobbying is “no substantial part” of the organization’s overall activities. In the case of Seasongood v. Commissioner, lobbying that was less than 5% of total activities was considered not substantial. In Haswell v. United States, spending 16.6% to 20.5% of an organization’s time on lobbying was considered to be substantial. If your organization never engages in any lobbying, you don’t have to worry about failing this test. However, if you do some lobbying, you should be concerned that this is a very subjective test, and the consequences of failing it can be substantial.
501 (h) Expenditure Test
Fortunately, you can choose to be measured under an objective test based on clear dollar limits—the 501(h) Expenditure Test. It requires a one-time election using IRS Form 5768. After filing the election form, the organization calculates a dollar limit each year on Form 990 that clearly identifies how much lobbying is allowed. This test gives clear definitions of lobbying. Only expenditures count and volunteer efforts and other cost-free things don’t.
The permissible lobbying expenditures for any tax year can’t exceed the lesser of : (1) $1,000,000 or (2)the sum of 20% of the first $500,000 paid or incurred for exempt purposes for the year, plus 15% of the second $500,000, plus 10% of the third $500,000, plus 5% of additional such expenditures.
There are two types of lobbying: direct lobbying and grassroots lobbying. Under the 501(h) Expenditure Test, an organization can use the entire lobbying limit on direct lobbying, but can only use 25% of it on grassroots lobbying.
- Direct Lobbying: is communicating with a legislator (federal, state, local) or legislative staff member about specific legislation and your view of the legislation.
- Grassroots Lobbying: is communicating with the general public about specific legislation, and your view of the legislation with a call to action. A call to action refers to:
- Urging people to contact their legislator or staffers;
- Providing the contact information for the legislators;
- Providing a postcard, petition, letter, web link, or other means to contact legislators; or
- Telling recipients who their legislators are and how different legislators plan to vote.
Expenditures counted in the expenditure test include personnel costs, communication costs, overhead, and payments to lobbyists or lobbying groups.
What Penalties Might the IRS Impose for Too Much Lobbying?
Under “No substantial Part” Test
The IRS can revoke an organization’s tax exempt status if lobbying is judged to be a substantial part of the organization’s activities. If this happens, all the organization’s income will be subject to corporate income tax. In addition, a 5% excise tax on lobbying expenditures may be imposed against the officers or directors who agreed to expenditures knowing the expenditure was likely to result in the loss of tax-exempt status.
Under 501 (h) Expenditure Test
A charity who has filed the 501(h) election pays a 25% excise tax on any lobbying expenditures that exceed the calculated limits. In addition, if the organization’s lobbying is more than 150% of the limit over a four-year period, the organization may lose its tax exemption, resulting in all of its income being subject to tax.
What Legislative Discussions Are Not Lobbying?
Discussing broad policy issues or discussing pending legislation without addressing its merits is not lobbying. Defending your organization against legislative actions which may affect the organization’s existence, powers and duties, tax exempt status, or public charity status is not lobbying. Responding to legislators’ written requests for information is not lobbying. Offering a nonpartisan analysis of legislation that presents all the facts, is widely available, and does not include a direct call to action is not lobbying. Communicating with regulatory and administrative bodies is not lobbying because these bodies do not legislate. Communicating with your own members is not lobbying as long as you do not encourage members to take action.
A 501(c)(3) organization can lobby. Organizations who intend to engage in lobbying activities should consider filing a 501(h) election with the IRS using Form 5768 to have a clear indicator of how much lobbying is allowed. If the organization chooses not to file the 501(h) election, it must keep its lobbying activities to a minimum to avoid penalties and protect its exempt status.
Rima Ghanem, CPA
Renner and Company, CPA, P.C.