No matter the outcome of last year’s presidential election, if your 501(c)(3) public charity was involved in lobbying, you’ll need to report the activity to the IRS. To preserve your organization’s tax-exempt status it’s important to review the activities permitted by the Internal Revenue Code (“IRC”) and Treasury Regulations to make sure your activities do not stray outside the rules. (Keep in mind that the following pertains to public charities, not private foundations, since the law applies differently.) The first step in this process is to review and understand the significant difference between two IRS terms: political activities and lobbying.
Political activities are actions that support or oppose any candidate for an elected federal, state or local office. These activities are strictly prohibited for public charities and can result in the loss of tax-exempt status.
Lobbying is an effort made by or on behalf of an organization to influence legislation. The term legislation refers to federal, state and local legislation. It also applies to referendums, initiatives, or constitutional amendments. This includes direct lobbying of lawmakers by the organization, as well as grassroots lobbying by asking the public to contact lawmakers.
It is important to note that lobbying occurs only when there is an expenditure of money by the public charity. However, administrative and personnel costs that support a lobbying function can be classified as lobbying expenses.
Lobbying is allowed for public charities as long as it is not substantial. Public charities that normally have lobbying expenditures may make an IRC Section 501(h) election (“h election”) to quantify ”substantial” via the expenditure test.
Under the expenditure test, organizations that make the h election under a 1976 lobbying law may spend 20% of the first $500,000 ($100,000) of their annual expenditures on lobbying, 15% of the next $500,000, and so on, up to $1 million dollars.
Without the h election, the IRS uses its “substantial part” test to review the lobbying activities of a public charity. The IRS considers a variety of factors, including the time (by both compensated and volunteer workers) and expenditures devoted by the organization to the activity, when determining whether the lobbying activity is substantial.
Under the substantial part test, an organization that conducts excessive lobbying in any taxable year may lose its tax-exempt status, resulting in all of its income being subject to tax. In addition, public charities that lose their tax-exempt status due to excessive lobbying, other than churches and private foundations, are subject to an excise tax equal to five percent of their lobbying expenditures for the year in which they cease to qualify for exemption.
Further, a tax equal to five percent of the lobbying expenditures for the year may be imposed, jointly and severally, against organization managers who agree to the making of such expenditures knowing that the expenditures would likely result in the loss of tax-exempt status.
The following activities that are neither lobbying nor political activities are permitted by public charities:
- Conducting educational meetings
- Preparing & distributing educational materials
- Providing analysis or research that is nonpartisan
- Providing technical advice that was requested by a legislative body
- Appearing before or communicating with a legislative body regarding the existence of the organization
- Communicating with members about legislation (without a call to action)
- Routine communications with legislators (without advocacy)
Determining the distinctions between political activities, lobbying and educational activities can be tricky. At Clark Schaefer Hackett we have the resources and expertise to assist you. If you have engaged in lobbying activities and are unsure how to report the activity to the IRS, please contact us for guidance.