Nonprofit Lobbying and the 501(h) Election
Prior to the 1976 Lobby Law, there was enormous ambiguity over the amount of lobbying that nonprofits could do. IRS rules state that tax-exempt nonprofits could lose their tax-exempt status if they do more than an "insubstantial" amount of lobbying. This "insubstantial-lobbying test" was never specifically defined in IRS rules, and individual IRS agents had little guidance in what constituted too much lobbying.
This rule remains the default test unless your organization opts to file the 501(h) election expenditure test. 501(h) establishes clear guidelines for lobbying expenditures by defining what percentage of an organization’s budget may be spent on lobbying without threatening their tax-exempt status. In 1990, the IRS published final rules on implementing the 1976 Lobby Law that make it quite clear that most nonprofits should elect to be covered by the lobbying-expenditure test and not fall under the vague insubstantial lobbying test.
Reasons Why a 501(c)(3) Should Elect to have 501(h) Status
- The 501(h) test is clear and easy to calculate.
- There are clear definitions of various kinds of lobbying communications.
- Volunteer and other efforts that do not cost the organization money will not count toward the exhaustion of the lobbying limits.
- An electing charity cannot lose its exemption for a single year’s excessive expenditures, while a non-electing charity can.
- There is no personal penalty for individual managers of an electing charity which exceeds its lobbying expenditure limits.
How to File the 501(h) Election
The 501(h) election is a very simple one-page
IRS Form 5768 that can be filed with the IRS at any time, which greatly clarifies the rules under which nonprofits can lobby. It does not need to be re-filed annually; the (h) election remains in place unless you choose to terminate your election.
How the 501(h) Election Maximizes an Organization's Lobbying Activity
- The organization only counts lobbying activity that costs money. Free activities, such as volunteer time, do not count against the organization’s lobbying limits because an organization does not pay its volunteers, including the organization’s board members.
- 501(h) provides a clear dollar limit on the amount of money an electing 501(c)(3) can spend on lobbying. The limits vary depending on the size of the organization’s budget. Small organizations that spend less than $500,000 a year can generally expend as much as 20 percent of their budget on lobbying.
- An electing 501(c)(3) may spend up to a quarter of its overall lobbying limit on “grassroots” lobbying (urging the general public to communicate the organization’s position on legislation to legislators) or up to the entire amount on direct lobbying (asking legislators or their staff to support or oppose legislation or urging the organization’s members to do so).
Expenditure Limits Under 501(h)
The total lobbying expenditure limits under the 501(h) election are:
- 20 percent of the first $500,000 of exempt purpose expenditures, plus
- 15 percent of the next $500,000 of exempt purpose expenditures, plus
- 10 percent of the next $500,000 of exempt purpose expenditures, plus
- Five percent of the remaining exempt purpose expenditures up to a total cap of $1 million.
Exempt purpose expenditures are all payments you make in a year except investment management, unrelated businesses and certain fundraising costs.
Direct and Grassroots Lobbying Under 501(h)
Under the 501(h) election, the IRS distinguishes between direct and grassroots lobbying.
Direct lobbying is when you state your position on specific legislation to legislators or other government employees who participate in the formulation of legislation, or urge your members to do so. In order to count as direct lobbying it must refer to specific legislation and express a view on it. Advocacy on ballot measures after they have been placed on the ballot is considered direct lobbying, since the public becomes the decision maker.
Grassroots lobbying is when you state your position on specific legislation to the general public and ask the general public to contact legislators or other government employees who participate in the formulation of legislation. If you do not include a specific call to action in your communication to the general public, it is not considered lobbying.
The distinction between direct and grassroots lobbying is important under the 501(h) election because the 1976 Lobby Law specifies different expenditure limits for grassroots and direct lobbying activity. An organization may spend only one-fourth as much on grassroots lobbying, as on direct lobbying. For example, if an organization's annual permissible lobbying expenditures were $100,000, it could spend only $25,000 on grassroots lobbying. But it could spend the remaining $75,000 on direct lobbying.
IRS Reporting Requirements Under 501(h)
All 501(c)(3) organizations (except churches, association of churches and integrated auxiliaries) must report lobbying expenditures to the IRS annually through Schedule C on Form 990. For those nonprofits that take the 501(h) election, the organization is required to report how much was spent on lobbying and how much of the total amount for the year was spent on grassroots lobbying. Organizations that do not take the 501(h) election must provide detailed descriptions of a wide range of activities related to lobbying.