Can a nonprofit organization get political? Could penalties be involved? Could the organization’s exempt status be at risk? It may be surprising to learn that some nonprofits may be able to engage in legislative lobbying activities.
The main caveat to an organization’s ability to participate in lobbying activities is that those activities must constitute an insubstantial portion of that organization’s total activities. But what does insubstantial mean? Neither Congress nor the IRS has provided a concrete definition of what constitutes “substantial”, which could make lobbying risky.
If your organization is struggling to determine if its lobbying activities are substantial, the Section 501(h) election may be a solution worth considering.
What is a 501(h) Election?
The 501(h) election provides clarity to this gray area by establishing dollar limitations on lobbying expenditures. Section 501(h) allows nonprofit organizations to elect “safe harbor” dollar limitations on lobbying expenditures in place of the more subjective limits to determine substantiality.
What are lobbying expenditures?
Lobbying expenditures, as defined by federal tax law, are “expenditures for the purpose of influencing legislation.” Legislation refers to any action by Congress, state legislature, local council, or similar body on a bill, draft bill, referendum ballot initiative, constitutional amendment or similar procedure. Section 501(c)(3) of the tax code states that no substantial part of the activities of the organization may constitute “carrying on propaganda, or otherwise attempting, to influence legislation.”
What are the benefits of making the election? What are the risks?
Because the 501(h) election is a safe harbor based on expenditures with a set dollar limitation, other factors, such as volunteer labor, are not considered when evaluating the level of lobbying activities that an organization engages in. The major risk of making a 501(h) election is spending more than the “lobbying ceiling amount.” The consequence of overspending in any one year is an excise tax of 25% of the excess expenditures. If the organization exceeds its limits for four consecutive years, they risk losing their tax-exempt status, which would cause all income for that period to be subject to tax.
Who can make the election (and who can’t)?
In general, public charities are able to make the 501(h) Election. However, private foundations, churches, and supporting organizations that support noncharitable organizations exempt under 501(c)(4), (c)(5), and (c)(6) are not able make the election.
What about political campaign activity?
A 501(c)(3) organization cannot participate in any political campaign on behalf of or in opposition to any candidate for public office. Engaging in this type of activity will result in a loss of tax-exempt status. This differs from lobbying activities in that it takes a direct role in supporting/opposing a specific political candidate rather than merely attempting to influence political outcomes.
To learn more about the 501(h) election and its limitations, or to better understand if it may be a good option for your organization, please do not hesitate to contact our office at (858) 558-9200.