Lobbying and Political Activity by Tax-Exempt Organizations
Tax-exempt nonprofit organizations categorized under IRC 501(c)(3) in federal law [i.e. 26 USC 501(c)(3)] are generally permitted to "lobby" to some extent, but are absolutely prohibited from engaging in "political activity." The distinction between these two activities is crucial, but not always simple to make. Under federal law (IRC 501), lobbying to an extent beyond an "insubstantial" amount is only permitted by IRC 501(c)(3) organizations that may and do elect to qualify under the IRC 501(h) rules, which provides strict financial limits for lobbying expenditures. Violation of the laws and regulations controlling lobbying and political activity can result in any or all of: fines (in the form of excise taxes) against the organization, personal fines against organization managers, and loss of federal tax-exemption recognition. Obviously this is dangerous ground for 501(c)(3) tax-exempt organizations and their staff, yet lobbying is an important activity for many.
Nonprofit organizations planning to engage in lobbying or what might be considered political activity are strongly advised to first consult with a qualified lawyer. This text provides only an educational introduction to this area of NPO regulation, and absolutely must not be considered or used as legal advice.
The IRS presents a clear description of some issues and consequences of lobbying by 501(c)(3) organizations in IRS Publication 557, under Chapter 3: Section 501(c)(3) Organizations, under "Lobbying Expenditures."
Note that federally funded tax-exempt organizations may be subject to even more strict regulation of lobbying and political activity than that described here. Such restrictions are typically described in circulars released by the Office of Management and Budget (OMB).
Tax-exempt organizations other than those described under IRC 501(c)(3) have far fewer requirements and restrictions on their lobbying and political activity. Some of these are described below.
Finally, this text includes links to federal law as published online the the Cornell Legal Information Institute. You may also view the law from the U.S. National Archives and Records Administration site, which is sometimes more up to date. However, both of these may be out-of-date at times, and therefore it is important to have other means of determining the current law (usually through a lawyer who subscribes to various newsletters and other notification services).
In IRC 501(c)(3), lobbying is described as "carrying on propaganda, or otherwise attempting, to influence legislation," while political activity is described as "participat[ing] in, or interven[ing] in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office." In short, IRC 501(c)(3) organizations may take sides with respect to political issues, but not political candidates. Since candidates commonly array themselves on opposite sides of issues, there are obvious difficulties at times in distinguishing between actions that support an issue but not a particular candidate.
Organizations that plan to make lobbying a very substantial part of their activities are often advised not to apply for federal tax-exempt status under IRC 501(c)(3), which prescribes strict limits to this type of activity, but rather under another classification. Although this entails losing certain advantages associated with IRC 501(c)(3) status, it also frees the organization from the significant limits on lobbying and political activity imposed on IRC 501(c)(3) organizations.
Lobbying is the act of attempting to influence legislation, either directly or indirectly, and is explicitly defined under law as follows.
IRC 4911(d). Influencing legislation
(1) General rule
Except as otherwise provided in paragraph (2), for purposes of this section, the term ''influencing legislation'' means -
(A) any attempt to influence any legislation through an attempt to affect the opinions of the general public or any segment thereof, and
(B) any attempt to influence any legislation through communication with any member or employee of a legislative body, or with any government official or employee who may participate in the formulation of the legislation.
For purposes of this section, the term ''influencing legislation'', with respect to an organization, does not include -
(A) making available the results of nonpartisan analysis, study, or research;
(B) providing of technical advice or assistance (where such advice would otherwise constitute the influencing of legislation) to a governmental body or to a committee or other subdivision thereof in response to a written request by such body or subdivision, as the case may be;
(C) appearances before, or communications to, any legislative body with respect to a possible decision of such body which might affect the existence of the organization, its powers and duties, tax-exempt status, or the deduction of contributions to the organization;
(D) communications between the organization and its bona fide members with respect to legislation or proposed legislation of direct interest to the organization and such members, other than communications described in paragraph (3); and
(E) any communication with a governmental official or employee, other than -
(i) a communication with a member or employee of a legislative body (where such communication would otherwise constitute the influencing of legislation), or
(ii) a communication the principal purpose of which is to influence legislation.
(3) Communications with members
(A) A communication between an organization and any bona fide member of such organization to directly encourage such member to communicate as provided in paragraph (1)(B) shall be treated as a communication described in paragraph (1)(B).
(B) A communication between an organization and any bona fide member of such organization to directly encourage such member to urge persons other than members to communicate as provided in either subparagraph (A) or subparagraph (B) of paragraph (1) shall be treated as a communication described in paragraph (1)(A).
IRC 4911(e)(2). Legislation
The term ''legislation'' includes action with respect to Acts, bills, resolutions, or similar items by the Congress, any State legislature, any local council, or similar governing body, or by the public in a referendum, initiative, constitutional amendment, or similar procedure.
Lobbying is divided into two categories [as given by IRC 4911(d)(1)(A) and IRC 4911(d)(1)(B) above]:
The distinction between grass roots lobbying and direct lobbying is important because the rules given by IRC 501(h) set spending limits for all lobbying activities combined, and also specifically for grass roots lobbying.
"Political activity" is not defined in the law regulating tax-exempt organizations with more detail that in IRC 501(c)(3), where it is "participat[ing] in, or interven[ing] in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office." However, "political expenditure" is defined in further detail. Note, however, that 501(c)(3) tax-exempt organizations may lose their tax-exempt recognition for any political activity, and not just for making political expenditures. Therefore, the definition of a political expenditure given here should only be taken as a rough guide to what is most clearly considered political activity.
IRC 4955 (d) Political expenditure
For purposes of this section -
(1) In general
The term ''political expenditure'' means any amount paid or incurred by a section 501(c)(3) organization in any participation in, or intervention in (including the publication or distribution of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.
(2) Certain other expenditures included
In the case of an organization which is formed primarily for purposes of promoting the candidacy (or prospective candidacy) of an individual for public office (or which is effectively controlled by a candidate or prospective candidate and which is availed of primarily for such purposes), the term ''political expenditure'' includes any of the following amounts paid or incurred by the organization:
(A) Amounts paid or incurred to such individual for speeches or other services.
(B) Travel expenses of such individual.
(C) Expenses of conducting polls, surveys, or other studies, or preparing papers or other materials, for use by such individual.
(D) Expenses of advertising, publicity, and fundraising for such individual.
(E) Any other expense which has the primary effect of promoting public recognition, or otherwise primarily accruing to the benefit, of such individual.
IRC 501(c)(3) organizations that engage in any political activity may at the discretion of the IRS either immediately lose their tax-exempt status recognition, or be compelled to pay fines. These take the form of excise taxes, described in IRC 4955, levied against both the organization itself and the organization managers responsible for the illegal activity.
IRC 501(c)(3) tax-exempt nonprofit organizations are permitted to lobby beyond an "insubstantial" degree only if they elect to qualify under IRC 501(h) by submitting IRS Form 5768, and obey the associated laws and regulations. However, not all IRC 501(c)(3) organization are permitted to make that election. The only organizations that may elect to lobby under IRC 501(h) are those described in IRC:
and which are not:
In summary, only certain classes of public charity may elect to qualify under IRC 501(h) and therefore engage in a substantial amount of lobbying activity. Religious institutions, their auxiliaries and affiliates, and private foundations do not qualify under IRC 501(h) and therefore are prohibited from more than an insubstantial amount of lobbying.
IRC 501(c)(3) organizations wishing to engage in lobbying activities beyond an "insubstantial" amount must explicitly indicate their election to qualify under IRC 501(h) by submitting IRS Form 5768. Such organizations must also complete Section Part VI-A in their Form 990 Schedule A annual information returns. Federal law under IRC 501(h) and IRC 4911 together limit the amount that may be expended on grass roots lobbying and direct lobbying by IRC 501(c)(3) organizations.
If an IRC 501(c)(3) organization engages in lobbying beyond an insubstantial amount, and has not elected to qualify under IRC 501(h), it generally loses its federal tax-exempt recognition. If instead it has elected to qualify under IRC 501(h), but exceeds the limits set by that law, it must pay an excise tax based on the amount exceeding the specified limits. Since the consequences of exceeding the permissible lobbying expenditures for an organization electing to qualify under IRC 501(h) are only monetary payments, rather than the complete loss of tax-exempt recognition, organizations planning to engage in any amount of lobbying are usually best advised to choose the 501(h) election. There are no disadvantages to electing to qualify under IRC 501(h), and IRS officials have in fact indicated that organizations so electing are less likely to be audited on account of lobbying activities that those which do not elect.
There is no clear test for what constitutes a substantial amount of lobbying. In the past, courts have said that lobbying expenditures of more than 5% of an organization's total expenditures are substantial, but more recently courts have tended to look at the facts and circumstances of the individual case. Accordingly, if there is any doubt then an organization should probably elect to qualify under IRC 501(h).
The formulae for determining the maximum permissible lobbying expenditures, and the excise taxes due if these limits are exceeded, are complex. The maximum permissible expenditures are described in IRS Publication 557, under Chapter 3: Section 501(c)(3) Organizations, under "Lobbying Expenditures." A portion of that text is excerpted below, but the reader is strongly advised to consult IRS Publication 557 (and probably also a lawyer well versed in this subject):
"Lobbying expenditures limits. If a public charitable organization makes the election to be subject to the lobbying expenditures limits rules (instead of the substantial part of activities test), it will not lose its tax-exempt status under section 501(c)(3), unless it normally makes lobbying expenditures that are more than 150% of the lobbying nontaxable amount for the organization for each tax year or normally makes grass roots expenditures that are more than 150% of the grass roots nontaxable amount for the organization for each tax year. See Tax on excess expenditures to influence legislation, later in this section.
Lobbying expenditures. These are any expenditures that are made for the purpose of attempting to influence legislation, as discussed earlier under Attempting to influence legislation.
Grass roots expenditures. This term refers only to those lobbying expenditures that are made to influence legislation by attempting to affect the opinions of the general public or any segment thereof.
Lobbying nontaxable amount. The lobbying nontaxable amount for any organization for any tax year is the lesser of $1,000,000 or:
1. 20% of the exempt purpose expenditures if the exempt purpose expenditures are not over $500,000,
2. $100,000 plus 15% of the excess of the exempt purpose expenditures over $500,000 if the exempt purpose expenditures are over $500,000 but not over $1,000,000,
3. $175,000 plus 10% of the excess of the exempt purpose expenditures over $1,000,000 if the exempt purpose expenditures are over $1,000,000 but not over $1,500,000, or
4. $225,000 plus 5% of the excess of the exempt purpose expenditures over $1,500,000 if the exempt purpose expenditures are over $1,500,000.
The term exempt purpose expenditures means the total of the amounts paid or incurred (including depreciation and amortization, but not capital expenditures) by an organization for the tax year to accomplish its exempt purposes. In addition, it includes:
1. Administrative expenses paid or incurred for the organization's exempt purposes, and
2. Amounts paid or incurred for the purpose of influencing legislation, whether or not the legislation promotes the organization's exempt purposes.
Exempt purpose expenditures do not include amounts paid or incurred to or for:
1. A separate fund-raising unit of the organization, or
2. One or more other organizations, if the amounts are paid or incurred primarily for fund raising.
Grass roots nontaxable amount. The grass roots nontaxable amount for any organization for any tax year is 25% of the lobbying nontaxable amount for the organization for that tax year."
"Tax on excess expenditures to influence legislation. If an election for a tax year is in effect for an organization and that organization exceeds the lobbying expenditures limits, an excise tax of 25% of the excess lobbying expenditures for the tax year will be imposed. Excess lobbying expenditures for a tax year, in this case, means the greater of:
1. The amount by which the lobbying expenditures made by the organization during the tax year are more than the lobbying nontaxable amount for the organization for that tax year, or
2. The amount by which the grass roots expenditures made by the organization during the tax year are more than the grass roots nontaxable amount for the organization for that tax year.
Eligible organizations that have made the election to be subject to the limits on lobbying expenditures and that owe the tax on excess lobbying expenditures (as computed in Part VI-A of Schedule A (Form 990)) must file Form 4720, Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the Internal Revenue Code, to report and pay the tax."
Although 501(c)(3) organization are absolutely prohibited from engaging in political activity, other 501(c) organizations generally may do so as long as that is not their primary activity. However, any federally tax-exempt organization classified under IRC 501(c) must file IRS Form 1120-POL for any year in which it:
Note that there exists a specific class of organization that qualifies for limited federal tax-exemption, outside of IRC 501(c), whose primary activity is political activity, and which is called a "political organization." This classification is described under law in IRC 527.
Federally tax-exempt organizations other than those described by IRC 501(c)(3) generally have no restrictions placed upon their lobbying activities under the Internal Revenue Code (though they may still be restricted as a condition of receiving federal funds). There is no specific classification called "lobbying organization" under federal law, and therefore to qualify for tax-exemption organizations must first meet the requirements of one of the existing classifications. There is a type of IRC 501(c)(4) social welfare group called an "action organization," which is the classification most commonly chosen for organizations established to promote a particular public cause, that they believe advances the public good, through public education and lobbying.
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