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Posted by Betty Isler on Mon, Dec 14, 2015 @ 03:29 PM

Lobbying is among the most effective tools not-for-profits have to promote their causes. Not-for-profit and charitable organizations routinely lobby Congress and local governments in support of specific objectives. Whether it is to feed the homeless, rehabilitate drug abusers, support community arts, protect wetlands or serve countless other local, regional, national and international purposes, not-for-profits are permitted to engage in lobbying activities as long as they meet certain guidelines put forth by Congress and the IRS.

The federal government supports lobbying by not-for-profits. Congress sent that unambiguous message when it enacted liberal lobbying provisions under a 1976 law. The message was reinforced by IRS regulations issued in 1990.

Organizations should review the federal lobbying requirements carefully. A 501(c)(3) that engages in too many lobbying activities risks penalties and even the loss of its tax-exempt status.

Definition of Lobbying

Activities considered to be lobbying take on a range of forms. Direct lobbying occurs when an organization states its position on specific legislation to legislators or other government employees who participate in the formulation of legislation. Not-for-profits are also engaging in direct lobbying when they urge members of the legislative body to take part in drafting legislation related to their cause.

Entities are grassroots lobbying when they state their position on legislation to the public and ask the public to contact legislators or other government employees who participate in the formulation of legislation.

Organizations, however, may involve themselves in issues of public policy without the activity being considered lobbying. For example, organizations may conduct educational meetings, prepare and distribute educational materials or otherwise discuss public policy issues in an educational manner without jeopardizing their tax-exempt status.

Allowances under the 1976 Law

As mentioned earlier, the 1976 law created lenient guidelines on lobbying. Many organizations are choosing not to adhere to the guidelines – something that could land them in hot water. To prevent problems from arising in the future, it is recommended that your organization elect to come under the umbrella of the 1976 law by completing IRS Form 5768, Election/Revocation of Election by an Eligible Section 501(c)(3) Organization to Make Expenditures to Influence Legislation.

By completing the Form, entities are electing an expenditure test to measure their lobbying activity. Entities can lobby to a certain dollar ceiling based on their overall budget (less certain costs of fundraising and income production).

Amount of Exempt-Purpose Expenditures

Lobbying Nontaxable Amount

≤$500,000

20% of exempt-purpose expenditures

$500,001- $1,000,000

$100,000 + 15% of the excess expenditures over $500,000

> $1,000,000 - $1,500,000

$175,000 + 10% of the excess of exempt- purpose expenditures over $1,000,000

≥$1,501,000

$225,000 + 5% of the exempt-purpose expenditures over $1,500,000

Generally, organizations that elect 501(h) may spend 20 percent of the first $500,000 of their annual expenditures ($100,000) on direct lobbying, 15 percent of the next $500,000 ($75,000), 10 percent of the next $500,000 ($50,000) and 5 percent of the excess over $1.5 million. The total direct lobbying expenditure limit is $1 million a year. The grassroots lobbying limit is 25 percent of the direct lobbying amount.

Organizations that elect the law are granted more leeway in their activities than those that do not elect. Not-for-profits that do not file Form 5768 are subject to the "substantial" test. What is considered substantial lobbying is unclear. The IRS might claim that there is some absolute level of lobbying activity — measured by dollars, time, public prominence, success, or importance to the not-for-profit — that meets the test, but the IRS has never clearly defined what the threshold would look like. An organization that has not elected 501(h) can never be certain when it is straying beyond the legal lobbying limits.

Additionally, the 501(h) election provides clear guidelines about what activities are considered lobbying. Under 501(h), lobbying occurs only when there is an expenditure of money by the not-for-profit for the purpose of attempting to influence legislation. Where there is no expenditure, there is no lobbying. There is no assurance that the IRS would apply so permissive a standard to organizations that do not elect.

The rules for electing organizations clearly exclude from lobbying a broad range of activities that not-for-profits might undertake that are related to legislation. In other words, electing not-for-profits can conduct many important legislation-related activities, and these activities will not be considered lobbying by the IRS. Again, there is no assurance that the IRS would be so lenient with not-for-profits that have not elected.

Electing

Organizations must file the one-page IRS Form 5768 indicating that their governing body has elected to come under the provisions of the 1976 law. Churches and private foundations are not permitted to make the 501(h) election. The Form can be filed any time during the organization’s tax year. The election is effective throughout that tax year and for succeeding years. If an organization wants to revoke its election and return to the substantial test, it can do so by filing the same form and simply checking a different box. Revocation is effective when the organization’s next tax year begins.

If an electing organization exceeds its lobbying ceiling it may be assessed a penalty of 25 percent of the amount of the excess spending (not the total spent for lobbying). If the not-for-profit exceeds a ceiling by 50 percent on a four-year aggregate basis, it can it lose its tax exemption.

For More Information

To learn more information about the benefits of electing 501(h), please view our webinar or contact us here.

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Betty_IslerBetty Isler is a Managing Director in the Tax Group of CBIZ MHM in the Tampa Bay office. She can be reached at 727.451.7923 or BIsler@cbiz.com.
 

 

 

 

Tags: lobbying, not-for-profit, Non-profits, NFP, Betty Isler

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