A Section 501(c)(3) tax–exempt organization may conduct limited lobbying activities without jeopardizing the organization’s tax–exempt status, so long as lobbying does not form a “substantial part” of the organization’s overall work.
An organization that intends to lobby and wants to be tax-exempt can apply either as a 501(c)(3) public charity or as a 501(c)(4) organization. Although a Section 501(c)(4 ) organization is tax-exempt (i.e., the organization itself pays no taxes), donations to it are not tax-deductible to the donor. So typically, the 501(c)(4) route is not as popular an option as organizing under Section 501(c)(3).
If the organization wants to lobby but does not intend for lobbying to be its primary activity, it may be possible to organize and file for tax-exempt status as a 501(c)(3) organization. A 501(c)(3) organization is tax-exempt itself, and donations to it are tax-deductible to the donor. Under Section 501(c)(3), an organization can do some lobbying – it just cannot devote a “substantial part” of the organization’s activities to lobbying.
Lobbying can be “direct” or “grassroots.” Direct lobbying is defined as any communication with a legislator that expresses a view about specific legislation (or other matter on which the legislator may vote). Grassroots lobbying is defined as any communication with the general public that (a) expresses a view about specific legislation (or a matter on which the legislature is voting) and (b) includes a call to action.
The IRS has two alternative tests for determining “substantial.” One way is in terms of relative time spent on lobbying activities. The other and probably best way to stay beneath the “substantial” threshold is to meet the “expenditure test.” A complete table is below, but in general, an organization with an overall budget of less than $500K may spend only up to 20% of that budget on lobbying. To use the expenditure test, the organization must file a form to elect to do so, and then the expenditure reporting must appear on the organization’s normal 990 annual reporting form.
|If the amount of exempt purpose expenditures is:||Lobbying nontaxable amount is:|
|≤ $500,000||20% of the exempt purpose expenditures|
|>$500,00 but ≤ $1,000,000||$100,000 plus 15% of the excess of exempt purpose expenditures over $500,000|
|> $1,000,000 but ≤ $1,500,000||$175,000 plus 10% of the excess of exempt purpose expenditures over $1,000,000|
|>$1,500,000 but ≤ $17,000,000||$225,000 plus 5% of the exempt purpose expenditures over $1,500,000|
Certain gray-area activities have been held to be “non-lobbying advocacy” as opposed to “lobbying.” These advocacy activities can be unlimited and do not count against the lobbying expenditure test. Examples are educating policymakers and the public about broad social issues, encouraging people to register to vote, organizing communities, educating voters about candidate positions, litigating, conducting educational meetings, preparing and distributing educational materials, considering public policy issues in an educational manner, and other activities.
If a 501c3 organization goes over the line and devotes a “substantial” part of its activities to lobbying, then the penalties are severe. Tax-exempt status is retroactively lost; deductibility of donations is retroactively lost; a 5% excise tax may apply; and a very large penalty (usually 25%) applies to the tax that will be due. Hence, close monitoring of lobbying activities is an absolute necessity.
A political activity in which a 501(c)(3) organization may never engage is to support or oppose any candidate for public office. This prohibition is absolute.
All organizations that conduct lobbying are subject to reporting and disclosure rules at the state and local level.
For more information about nonprofit organizations, or to find out about our fixed fees for formation of charitable organizations and family foundations, please contact us.
Liza Farrow-Gillespie serves as legal counsel to nonprofit organizations throughout North Texas. Ms. Farrow-Gillespie has been named to the list of Texas Super Lawyers (a Thomson Reuters service) and to the list of Best Lawyers in Dallas by D Magazine in every year since 2013.