- posted by Frank Monti in the Mission Matters Blog
This year is another election year and election years usually mean an uptick in legislative activity as elected officials attempt to burnish their records. Therefore it is a good time to review the rules and regulations affecting not-for-profit, tax-exempt entities and the campaign and lobbying process. In this blog, I will address this subject only from the standpoint of organizations exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code. Similar but different rules affect other types of not-for-profit organizations and you should contact us if you have a question about one of these tax-exempt entities.
In Part IV of the IRS Form 990 there are three questions dealing with campaign and lobby activity. A yes answer to any of these questions requires the organization to complete Schedule C of the Form 990. If you engage in either of these activities, you will be required to fully disclose your activities in Schedule C that is completed and signed, like the rest of the Form 990, under penalty of perjury.
Question #3 of Part IV asks if the organization engaged in any direct or indirect political campaign activity on behalf of or in opposition to candidates for public office. Since this is a yes/no question with further explanation required in Schedule C, it may give the reader an incorrect impression. Schedule C even contains an excise tax calculation associated with campaign activities. However, a “yes” answer to question 3 will have disastrous results. Aside from the excise tax, involvement in a political campaign (even indirect involvement) by a 501(c)(3) organization is strictly forbidden and will likely result in revocation of the organization’s tax exempt status. The fact that the Form innocently asks the question and also allows for an excise tax payment misrepresents the seriousness of the “yes” response.
Lobbying – generally defined as any attempt to influence legislation through communication with a member or employee of a legislative body – is allowable within certain limitations. Those limitations can be very specific or very vague. For years the law simply said that 501(c)(3) organizations could engage in lobbying as long as that activity was “not a substantial part of the organization’s total activity”. Therefore, one could engage in an insubstantial amount of lobbying activity. Of course, there was never any official guidance of how much activity was substantial or insubstantial.
Finally the IRS issued official guidance relative to the amount of allowable lobbying. This guidance was included in Section 501(h) of the internal revenue code. The administrative quirk about this, however, is that a tax-exempt organization must make a one-time election by filing Form 5768 in order to have its lobby efforts evaluated under Section 501(h). If an organization does not make a 501(h) election, its lobbying efforts will continue to be evaluated under the old substantial/insubstantial regulations and the guidance included in Section 501(h) cannot be used in defense of its lobbing amounts.
Regardless of how little lobbying activity your organization may undertake, we recommend filing Form 5768 and making the Section 501(h) election. This does not mean that you are no longer a 501(c)(3) organization. Section 501(h) only has to do with your lobbying activity and the fact that you may not engage in lobbing activity every year is irrelevant – we still recommend the 501(h) election.
Part II of the Schedule C is where an organization discloses the amount of expenditures it incurred in connection with its lobbying activities. Part II-A is completed by organizations that have made the 501(h) election and Part II-B by those organizations who have not made the election. Therefore it is very clear to the IRS how they are to evaluate your lobbying activities.
The actual amount of allowable lobbying under Section 501(h) is actually fairly high and is probably of no concern to most organizations that are not politically active on a monthly basis. However we recommend that all organizations regardless of the amount of their lobbying expenses make the 501(h) election.
If all of this isn’t confusing enough, another complex subject is what kinds of activities constitute lobbying activities? As you may imagine, this subject consumes pages of IRS regulations and the difference between measurable lobbying expenditures and irrelevant (from a lobbying standpoint) education activities is very slight. We can assist you in navigating these waters if lobbying is important to your mission.
It is important to always remember (and especially in election years) that you may not engage in any direct or indirect campaign activities but you may lobby the legislature within certain limits. We can help you file Form 5768 and make the appropriate 501(h) election.
To learn more read our whitepaper: Political Campaign Activity and Lobbying Activity for 501(c)(3) Organizations