“Tell your state rep to vote for State Bill X, to protect __________!” May a Section 501(c)(3) nonprofit legally spend its money (and use volunteers) to urge enactment or defeat of pending or proposed legislation? Yes, but only through “insubstantial” lobbying, and subject to related legal constraints. For public charities, lobbying communications lie between fully permissible educational issue advocacy[1] and prohibited political campaign activity.[2]
The High-Level View
Lobbying restrictions can quickly get complicated and confusing. For example, what does the amorphous “insubstantial” term mean in relation to lobbying? Measured purely in financial terms, the amount of volunteer activity, based on an organization’s lobbying activities alone, or in proportion to all of the organization’s activities? The IRS may look at these considerations together or in some combination, so they are all significant.
Generally speaking, Section 501(c)(3) public charities may use only up to 5% of their expenditures (on an annual basis) for “indirect lobbying,” also known as “grassroots lobbying,” and 15% of their expenditures for “direct lobbying.” These financial aspects are easiest to measure, so they typically garner the most attention. Proportionality is key: how much a nonprofit spends on lobbying in relation to its other tax-exempt activities, and measured periodically over time.
The penalties for violating the lobbying restrictions can be severe, including loss of tax-exempt status. Consequently, prudent public charity leaders often aim to keep lobbying to a minimum, to track any lobbying activity, and to consult with legal counsel when questions arise.[3]
Digging Deeper - Grassroots and Direct Lobbying
What’s the difference between grassroots and direct lobbying? The distinction is important to recognize and track in terms of expenditures, since the applicable limitations are so different.
Through grassroots lobbying, nonprofits seek to influence legislation by stirring up the public, such as urging people to contact their lawmakers. Grassroots lobbying communications usually state a position to a targeted group and ask them to contact legislators and other individuals who participate in the formulation of legislation. Such activity may involve writing and distributing form letters for citizens to send to legislators, and it may involve paid staff as well as volunteers. These lobbying communications often include three components: (1) they refer to some specific issue or legislation; (2) they advocate a specific stance on the legislation, directly or implicitly; and (3) they call the recipient to take action with respect to the issue or legislation, such as by contacting their legislator.
A common example today of grassroots lobbying is a tweet – e.g., “Call your Senator today – the proposed health care legislation protects our senior citizens (or not) and thus should be enacted!” Social media provides wonderful (and cheap) tools for rallying the troops and motivating many readers and listeners to action. Such activity therefore may be in danger of becoming “substantial” (in IRS parlance) while not necessarily involving much money spent, so be careful! Think through what else the organization is doing, and make sure that the nonprofit is carrying plenty of other non-lobbying activities.
Direct lobbying refers to attempts to influence legislation through direct communication with any member of a legislative body, or other staff or official who may participate in the formation of legislation, with the purpose of influencing such legislation. Direct lobbying communications state a position on specific legislation to legislators or others who participate in the formulation of legislation. Direct lobbying may involve meetings, emails, or other communications. Expenditures on direct lobbying can become quite expensive, such as if the public charity engages a lobbyist as a consultant or hires a lobbyist in-house for a special campaign. So watch this spending and mind the 15% spending limit, especially in proportion to the organization’s other expenses.
What is Not Lobbying?
Notably, Section 501(c)(3) organizations do not engage in lobbying for purposes of the IRS restriction if they make any of the following communications (provided that such efforts do not involve a call to action regarding specific legislation as described above):
- public education or educational issue advocacy;
- advocacy directed toward executive or administrative bodies (e.g., to urge enforcement of laws or to advocate about rules or regulations);
- nonpartisan analysis, study, or research, such as educational studies that advocate particular positions;
- responses to requests for technical advice, such as if a congressional committee asks in writing for materials to be made available to all committee members; or
- “self defense” communications with a legislative body (or representative thereof) about potential action by such body that would affect the nonprofit’s existence, powers, or tax-exempt status.
These activities may be tracked, just in case a question arises later about whether they should be considered as lobbying.
How About a Section 501(h) Election?
The phrase “Section 501(h)” election refers to the voluntary filing of IRS Form 5768. All Section 501(c)(3) organizations may file this one-time election, except churches, other religious institutions, and private foundations. An organization should not file a Section 501(h) unless it intends to engage in significant and regular lobbying. While all organizations must report lobbying activity through their Form 990 returns, the Section 501(h) election will heighten the level of reportable lobbying information.
The Section 501(h) election provides a “safe harbor,” allowing a tax-exempt organization to pay taxes for exceeding permissible lobbying limits. Keep in mind, however, that this safe harbor may not be so secure given the broader “insubstantial” legal standard, which is inherently vague and may be viewed purely in financial terms or in combination with other factors. Such activities may therefore result in revocation of 501(c)(3) tax exemption, notwithstanding an organization’s Section 501(h) election. That would be an extreme result, and one that should be avoided with ongoing careful monitoring.
Under the Section 501(h) election, the annual allowable (nontaxable) exempt purpose expenditures vary slightly from the 15%/5% limits described above, as follows:
Amount of Exempt Purpose Expenditure:
Maximum Lobbying Nontaxable amount:
≤ $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
$225,000 plus 5% of the exempt purpose expenditures over $1,500,000, but in no case to exceed $1,000,000
Legally Compliant Lobbying
With these legal parameters for lobbying in mind, what should a responsible Section 501(c)(3) public charity do if it makes lobbying communications? In short: track, report, and watch out! Leaders should ensure that the requisite IRS record-keeping requirements for lobbying activities are satisfied. In particular, the following information should be tracked: (a) dates of lobbying activities; (b) amount of staff time devoted to such activities; (c) personnel involved (whether paid or volunteer); (d) summary description of campaigns and goals; (e) preliminary identification of whether the activity is grassroots lobbying, direct lobbying; and (f) potential applicability of one or more of the above-listed lobbying exceptions.
All of this information will be extremely important for the organization’s annual IRS Form 990 reporting. Some activity may involve elements of both lobbying and non-lobbying, so some allocations or distinctions may need to be made – at the time of the activities or possibly later in connection with the organization’s Form 990 reporting.
The organization should also monitor the amount of total funds spent on lobbying, in proportion to its total revenues and expenses. If the organization’s lobbying expenditures become too high, either for comfort within the “insubstantial” lobbying restriction or to avoid unwanted penalties per Section 501(h), the organization may wish to adjust its future activities and evaluate its record-keeping further (particularly to determine the applicability of available exceptions). The organization’s leaders may also wish to consider developing an ancillary Section 501(c)(4) social welfare organization. Such tax-exempt entity may engage in unlimited lobbying (and limited political campaign activity too), but it does not qualify to receive tax-deductible contributions.
Note too that additional lobbying registration and disclosure requirements may apply for direct lobbying. The federal Lobbying Disclosure Act of 1995 includes varying thresholds for registration for persons who engage in lobbying, depending on the amount of funds and time spent on lobbying. The Act also defines “lobbying” more broadly than the IRS and imposes more extensive accompanying disclosure requirements. State and local laws may warrant careful attentiveness too, as exemplified recently by former Obama campaign manager David Plouffe’s whopping $90,000 fine under Chicago’s lobbying ordinance for improperly emailing Mayor Rahm Emanuel on behalf of Uber.
Wrapping Up
If your Section 501(c)(3) public charity engages in lobbying, then keep it appropriately “insubstantial,” with careful tracking of lobbying activities and compliance with other aspects of applicable regulatory requirements. The nonprofit leadership may decide at some point that a Section 501(h) election is warranted. And if more extensive lobbying activity becomes appropriate, then the leadership may wish to form Section 501(c)(4) social welfare “action” organization. Keep in mind too how the organization can best accomplish its mission, by carrying out its programs themselves, non-lobbying advocacy, and possibly political engagement through lobbying.
[1] See Wagenmaker & Oberly Blog Article, IRS Take Note: The Tie Goes to the Speaker
(Jan. 31, 2014).
[2] See Wagenmaker & Oberly Blog Article, Don’t Get Trumped – By Politics (Sept. 29, 2015).
[3] Note that Section 501(c)(3) private foundations may legally engage in lobbying too, but they will be subject to excise taxes for such expenditures. Consequently, private foundations sometimes expressly prohibit lobbying activity in their grant-making to public charities.
