Understanding the myth vs. the reality of NFPs and politics
It’s a myth that not-for-profits must remain apolitical. Under Internal Revenue Code Section 501(c)(3), charitable organizations can participate in advocacy, such as educating the public about an issue central to their mission. And they can even engage in lobbying — within limits. But it’s important for not-for-profits to exercise caution when participating in political activities — or they may risk their tax-exempt status. This article explains the different rules for 501(c)(3) and 501(c)6 organizations.
Primaries, pundits and stumping politicians dominate the news, and special interest ads fill the commercial breaks. It’s election time again, and some people will do anything to put their candidate in office. But should they? If you run a not-for-profit, exercise caution when participating in political activities — or you may risk your tax-exempt status.
Myth and reality
It’s a myth that not-for-profits must remain apolitical. Under Internal Revenue Code Section 501(c)(3), charitable organizations can participate in advocacy, such as educating the public about an issue central to their mission. And they can even engage in lobbying — within limits.
For example, it’s generally acceptable to ask legislators to take a particular position on pending legislation or to ask your supporters to contact legislators about a legislative proposal. For many not-for-profits, such lobbying activities are critical to their mission. The IRS, however, prohibits 501(c)(3)s from engaging in activities it calls “campaign intervention,” such as advocating on behalf of a particular candidate.
2 tests for 501(c)(3)s
The IRS provides two tests to measure the acceptability of lobbying activities:
1. Substantial part. Lobbying can’t be a “substantial” part of your not-for-profit’s activities. Unfortunately, the IRS isn’t very explicit about what constitutes “substantial” or even “lobbying.”
2. Expenditure. Also known as the 501(h) election of the 1976 Lobby Law, the expenditure test provides a more reliable method of measuring lobbying activity. The test allows nontaxable expenditures of up to $1 million (based on a sliding scale) for lobbying, such as communication about specific legislation with lawmakers or your members. This includes up to $250,000 on grass-roots efforts — defined as communicating with the general public about an issue and asking them to contact legislators.
To comply with the rules, 501(c)(3) charities must report lobbying expenditures on their annual Form 990. In addition, you may want to elect the expenditure test — otherwise, the IRS will decide whether your lobbying expenditure is “substantial.” If your not-for-profit has exceeded its nontaxable threshold and you owe excise taxes, you must report expenditures on Form 4720.
Not all not-for-profits follow the same rules. Associations and other 501(c)(6) organizations have more freedom to engage in political activities. There’s no limit on political spending as long as it’s related to the organization’s exempt purpose. Although political expenditures are allowed, they must be properly structured to avoid taxation to the organization. Please consult your CPA or attorney before engaging in any political expenditures for your association.
Note, however, that association members cannot deduct on their individual tax returns any portion of membership dues that is used to fund political or lobbying activities. These organizations need to disclose to their members what portion of dues is used for that purpose. The exception to this rule is expenditures made to influence local legislation, which generally are tax-deductible.
Use common sense
During election season, 501(c)(3) organizations are probably safest to focus on education and awareness by, for example, sponsoring candidate forums and voter registration drives. Don’t risk your tax-exempt status by endorsing a politician or party or participating in activities designed to promote or discredit particular candidates. Associations and other 501(c)(6)s enjoy fewer restrictions; however, carefully accounting for and disclosing political expenditures is critical.
Due to the potential negative consequences that can result, it is always best to talk to your legal advisors if you are unsure of an activity or an expenditure.