Lobbying is permitted – and worthwhile - if nonprofits follow rules

Published in the October 19, 2007 edition of Columbus Business First

The permissibility of lobbying by 501(c)(3) tax-exempt nonprofits is widely misunderstood and many nonprofits needlessly limit their participation in public debates over critical legislation. 

Internal Revenue Service regulations permit, and in some ways expect, nonprofits to be engaged in legislative activities as long as it falls within guidelines.  Guidelines vary by the type of nonprofit. 

The IRS draws a sharp distinction between political and legislative activities. 

The first is prohibited while the second is not.  A nonprofit is “absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office.” 

Encouraging participation in the electoral process is permitted, but the activity must be non-partisan, show no bias toward any candidate, allow equal participation by any candidate, and solicit no political campaign contributions.  Furthermore, nonprofit leaders must not make partisan comments in official publications or functions and, in other settings, must clearly indicate that any personal partisan views do not represent the views of the organization.

Any violation of this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise taxes on the prohibited expenditures. 

Moderate Legislative Activity Permitted

In contrast, nonprofits can engage in activities that seek to influence legislation.  In fact, since the justification for nonprofit status is to fulfill a community need, influencing legislation that would affect or alleviate the need should often be an essential component of a nonprofit’s mission. 

Not surprisingly, however, the IRS emphasizes that this activity can be a component of the nonprofit’s activities but must not be a “substantial part” of its activities.

The IRS Form 990 Part A Section VI is the primary test for a nonprofit’s lobbying activities.  A nonprofit has two ways to demonstrate compliance.  The default option is the “substantial part” test consisting of answering yes or no questions and reporting expenditures for lobbying activity.  Under this option, the nonprofit leaves it up to the IRS to determine if this activity is “substantial.” 

A nonprofit can have a more exact handle on the permissibility of its lobbying activities by choosing to be an “electing public charity” so that the provisions of section 501(h) of the Internal Revenue Code apply.  This election requires filing Form 5768 prior to the commencement of a fiscal year. 

This “expenditure test” uses a specific test based roughly on the relative size of lobbying expenditures to total spending by the nonprofit.  This option may be preferable because the relative size allowed is fairly generous.  For example, a nonprofit with $500,000 of mission-related expenditures can spend up to $100,000 on lobbying activities.  A nonprofit with mission-related expenditures of $10 million can spend up to $650,000.  The largest nonprofits have a lobbying expenditure cap of $1 million a year. 

These limits in practice are even more generous because many legislative activities do not count against this cap.  For example, communications with a nonprofit’s membership regarding legislation of direct interest to its mission do not count against this limit.  Nor do expenditures for nonpartisan analysis or research, discussing broad social or economic problems, or appearing before or communicating with any legislative body regarding any legislation affecting the nonprofit organization directly. 

Even though these limits seem high, it is imperative nonprofits monitor their compliance.  The law sets separate standards for activities to influence the general public and the legislature . 

Penalties for exceeding these limits can be severe.  Expenditures above these limits are subject to a 25 percent tax on the excess in that year.  Excessive lobbying over any four-year period can result in loss of tax-exempt status. 

Moreover, there is a possible tax of 5 percent of total lobbying expenditures that can be imposed on an organization’s managers, who ”agree to including those expenditures knowing the expenditures would likely result in loss of tax-exempt status.”

While the regulations can seem complex and the penalties harsh, most nonprofits will find that a focused lobbying program that is coordinated with delivery of its mission is safely within these limits. 

Expenditures for monitoring legislation or informing one’s membership are virtually unlimited. 

At least at the state and local levels, hiring lobbyists to support or oppose particular legislation will almost always remain less than six figures, safely below the limits for any nonprofit with mission-related expenditures of more than $300,000 per year. 

And sharing lobbying expenditures with similarly situated nonprofits further reduces the reportable amount. 

Allen J. Proctor was chief financial officer of Harvard University and is the author of “Linking Mission to Money, Finance for Nonprofit Board Members.”  www.proctorconsulting.org

Copyright 2007. Reprinted with permission, Business First of Columbus Inc.