There is a common misconception that exists within the non-profit community; it is that 501(c)(3) organizations are not allowed to lobby. The fear of some non-profits is that they could lose their tax-exempt status by engaging in lobbying activities. No organization wants to come close to jeopardizing their tax-exempt status or become subject to an IRS audit. However, you might not be aware that for this exact reason, the IRS provides guidance for non-profits as it pertains to lobbying expenses and time spent lobbying. If non-profits adhere to the IRS restrictions, they should not have to worry about receiving a threatening letter in the mail, or worse, an unexpected tax bill.
The IRS has two primary methods of measuring lobbying activities; a Substantial Part Test and an Expenditure Test. The Substantial Part Test is not as scientific as the Expenditure Test and is primarily related to how much time is being spent influencing legislation. However, technically it does also consider expenditures, albeit the IRS does not provide as much context as to how much in expenses is considered too much. This test is not very cut and dry as it leaves significant discretion to the IRS. Conversely, the Expenditure Test provides actual dollar amount expenditure thresholds.
Below is a chart that explains the thresholds for allowable lobbying expenditures using the Expenditure Test. In the left column is the total amount of the 501(c)(3)’s expenditures and in the right column is the amount that can be spent on lobbying to avoid a potential loss of tax-exempt status:
|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|
For example, a tax-exempt organization with $400,000 in total expenditures can spend up to $80,000 in lobbying expenses.
It is advisable for a 501(c)(3) to complete Form 5768 to elect the Expenditures Test. This protects your organization from being subject to the IRS using their own interpretation of your activities and expenses. It is also advisable to avoid coming close to spending the lobbying allowable nontaxable amount. Being well below the threshold will prevent the IRS from accusing your organization of “excessive lobbying”. It is worth stating that generally it takes a period of four consecutive years of violating the law before the 501(c)(3) is subject to losing tax-exempt status.
Some tax-exempt organizations might refer to “lobbying” as “advocacy” as a way to avoid the restrictions or the stigma that can be associated with lobbying. Although advocacy sounds lighter and fluffier, it does not change the activity being conducted. And, more importantly, calling the activity “advocacy” does not change the way in which the IRS views it; as you are still attempting to influence legislation at the federal, state or local level. Further, it is important to note that regardless of whether your organization uses paid staff, a contract lobbyist or even volunteers it is still considered time spent lobbying.
If you are a 501(c)(3) that does notengage in lobbying or advocacy, you are missing out on these opportunities:
- Potential funding (line-item, appropriation, etc.) from the state operating budget
- Potential funding (line-item, appropriation, etc.) from the state capital budget
- Protection from laws or regulations that may adversely impact your organization
- Enhanced exposure and awareness of your organizational mission
While it is true that 501(c)(3) organizations could lose their tax-exempt status if they fail either of the above tests, it is not always the case. The IRS may choose to impose a five-percent tax on the organizational managers that were deemed responsible for the expenditure overage. Also noteworthy, if your organization exceeds the lobbying limitations and the IRS does in fact choose to impose penalties, it should only lose tax-exempt status for the year in which the violation took place. Finally, although it is reasonable to have a certain level of apprehension, it is important to recognize that the IRS does not make a practice of witch-hunting 501(c)(3)’s that retain registered lobbyists or pay for lobbying in any fashion.
One final point regarding expenditures; under no circumstance can 501(c)(3) organizations contribute to political campaigns. However, if a director, employee or board member wishes to personally contribute to a candidate or issue campaign, there is generally no prohibition. The contributor merely needs to be aware of existing state and federal campaign contribution limits. If a 501(c)(3) wishes to engage in political campaigns they must either establish a separate Political Action Committee (PAC) or change the tax-exempt form in which they operate. That said, most non-profits will not want to take such drastic measures, so it is best to keep all campaign contributions personal.
If you decide to engage in lobbying and begin advocating for your 501(c)(3) with lawmakers, here are a few things to keep in mind when speaking with them:
- They do not have the exclusive ability to authorize funding, so if you have a financial ask of them expect to answer several questions about how the money would be used (tip: the legislature prefers to fund new pilot projects or existing programs rather than organizational operating costs)
- They want to build relationships with non-profit leaders in their district, but they need to know how they can help, aside from financial needs
- They want to help you fulfill your mission but have a lot of groups requesting meetings, so be patient and respectful of their time
- They enjoy having one or two-pagers about your non-profit in hand, so have a professional and aesthetically appealing document prepared
It is possible that your organization has not considered lobbying since historically you or your leadership team has found it to conflict with your mission. Maybe you are a newer non-profit that is unaware of how lobbying can positively impact your organization. Or, you may be afraid that lobbying expenditures or activities would lead to losing your tax-exemption; in any event, it may be time to reconsider. Lobbying or advocacy (whichever you wish to call it) can actually support your mission and help you grow, increase the reach you have in the community and allow you to help more people. SBCO works with non-profits that have legislative goals but are not aware of how to begin lobbying and we do our best to make you feel comfortable with the decision and the process.