Can your nonprofit engage in lobbying for favorable public policy or legislation? Many business associations, charities, and civic organizations are uncertain about how and when to lobby on their own behalf. If you’ve considered hiring a lobbyist for your nonprofit, but hesitate to make the move, you need to know how to stay on the right side of the Internal Revenue Service (IRS). Here is an overview to help guide your decision-making.
The nature and purpose of many nonprofits involves working for a cause, striving to change and improve the world around us. In fact, it has been argued that the most valuable public policies come from nonprofits lobbying on behalf of their causes.3
Nonprofit organizations rely on obtaining 501 (c)(3) tax status which qualifies them as tax exempt according to the IRS. In order to retain its status, a nonprofit is allowed to engage in activities that attempt to influence legislation (a definition of lobbying), as long as they are deemed “insubstantial,” or not a “substantial part of its activities.” In other words, your organization would be at risk of losing tax-exempt status if it engaged in too much lobbying.1 All income then becomes subject to tax. The question is, how much is too much, and what is considered a substantial vs. an insubstantial portion of a nonprofit’s activities? The IRS makes a judgment call on each case-by-case situation. The agency will examine:
- How much time staff and volunteers spend on lobbying activities.
- How much money is spent on these activities.
The IRS Expenditure Test
The agency has a specific way of assessing each nonprofit’s activities to decide if they exceed the rule of substantiality. It will measure both the amount of time spent on lobbying, and the amount of expenditures (note: this is not an option for churches or private foundations).
The limits the IRS sets look at the percentage of lobbying nontaxable dollars spent as a percentage of the organization’s total exempt purpose expenditures. For example, if your total exempt-purpose expenditures are $500,000 or less, you may spend up to 20% on lobbying.2
You can better anticipate how the IRS will view your activities if you file a special form, Form 5768, which allows you to Elect to make expenditures to influence legislation. This step is also known as “taking the 501(h) election, referring to the relevant section of the US tax code.” It only needs to be filed once, as long as your organization continues to be active in lobbying. It will stay in effect unless you file a new Form 5768 as a Revocation.3
The Big No-No
A nonprofit is not allowed to campaign for or against political candidates.
What Constitutes Lobbying?
Nonprofit organizations usually exist to effect change, but they should be informed about the ways the IRS defines lobbying. Generally, activities can be classed as directly lobbying, grassroots lobbying, or advocacy. Visit the IRS website to find detailed examples of each type, and be prepared to avoid potential conflict. Be confident you are doing all you can on behalf of your cause while remaining well within the law, by consulting with one of the top lobbying firms for nonprofits, like Lobbyit. Contact us for details at 202.587.2736.