Home / Articles / What an election year means for not-for-profits

What an election year means for not-for-profits

May 2, 2012

Share:

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.

Association rules

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.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

Guidance

Related Articles

Article

2 Min Read

The Details on GASB 97

Article

2 Min Read

Lease Accounting Standard ASC 842 Impacts on Debt Covenants and Capital Requirements

Article

2 Min Read

Federal Audit Clearinghouse Provider Changing from Census to GSA

Article

2 Min Read

Consequences of Not Being Proactive on Lease Accounting Standard ASC 842

Article

2 Min Read

Infographic: 4 Steps to Implementing the New Lease Accounting Standard

Article

2 Min Read

Maximize Your Tax Filing Preparedness & Awareness

Get in Touch.

What service are you looking for? We'll match you with an experienced advisor, who will help you find an effective and sustainable solution.
  • Hidden
  • This field is for validation purposes and should be left unchanged.