One of the biggest red flags for 501(c)(3) organization is whether or not they conduct certain political campaign and lobbying activities. These nonprofit organizations need to have a clear understanding of the way that the Internal Revenue Service views lobbying and its potential impact on them. The IRS does permit an organization to conduct a limited number of lobbying activities, but they are strictly prohibited from participating in political campaign activities. What does this really mean for an organization?
Lobbying is an activity an organization undertakes to influence legislation. This includes legislative action taken by Congress or another legislative body with respect to acts, bills, resolutions, etc. or by the public in referendum, ballot initiatives, etc. It does not include action by executive, judicial, or administrative bodies.
Political campaign activities are directly or indirectly performed for a candidate for elective public office. This activity can be contributions to political campaign funds or a public statement of position (written or verbal) for any candidate for public office. Since this is prohibited by 501(c)(3) organizations, we will focus on lobbying activities.
There are two types of lobbying and two separate ways to measure them. These are called Direct and Grassroots lobbying.
- Direct lobbying refers to direct communication with a legislator or employee of a legislative body regarding a specific piece of legislation and has a specific view of that legislation.
- Grassroots lobbying is any communication on a specific piece of legislation that gives a perspective of that legislation that further gives a call to action from the public.
The substantial part test evaluates the extent of an organization’s lobbying activities based on the activity’s facts and circumstances. There are a series of factors that are evaluated such as the time devoted to the activity by both compensated and volunteer works, and the expenditures devoted by the Organization to the activity. If the IRS determines that the activity is substantial or excessive, the Organization that participates can lose its tax-exempt status. This will cause the Organization to a) have all its income subject to tax and 2) pay an excise tax up to 5% of lobbying expenditures. This is a riskier approach.
The expenditure test is the alternative method to evaluating the lobbying activities of an organization. This is done through an election under IRC 501h. Under this test, the lobbying activities will not jeopardize an organization’s tax status, so long as the activities expenditures do not exceed a certain amount.
An Organization can evaluate its lobbying activities under the expenditure test by filing IRS Form, 5768, which is called “Election/Revocation of Election by an Eligible Section 501c3 Organization to Make Expenditures to Influence Legislation.” This form can be filed at any time during the year and remains in effect for succeeding years unless it is revoked by the Organization. By submitting this, the Organization sets the lobbying expenditures ceiling by using a sliding scale based on the Organization’s annual exempt purpose expenditures.
Regardless of whether an organization fills out Form 5768, when an organization prepares its annual Form 990, they would then report the activity on Schedule C. The purpose of the Schedule C is to provide additional information on political campaign or lobbying activities. The Organization would report the number of lobbying expenditures for direct and/or grassroots activities, therefore it is crucial that organizations track and monitor these expenditures very closely.
