Navigating Election Years For Nonprofits: Limitations On Lobbying
As we approach an election year, many nonprofits may find themselves in a position that they want to, or are asked to, support particular issues or candidates. However, Section 501(c)(3) specifically states that no substantial part of an exempt organization’s activities can involve carrying on propaganda, or otherwise attempting to influence legislation, and that the exempt organization may not, directly or indirectly, participate in or intervene in any political campaign, including the publishing or distributing of statements on behalf of, or in opposition to, any candidate for public office. If the exempt organization engages in substantial legislative activities or any political campaign activities, the organization risks having its exemption revoked.
Insubstantial Part Test
If nonprofits cannot engage in a substantial amount of lobbying activities, what about an insubstantial amount of lobbying? Generally, the “insubstantial part test” is the default test that applies if an exempt organization does not make a 501(h) election (discussed below). The insubstantial part test requires that no substantial part of the exempt organization’s activities is the carrying on of propaganda or otherwise attempting to influence legislation. Although the IRS has not provided guidance on how much lobbying is substantial, the generally accepted rule is that an organization can devote 3-5% of its overall activities to lobbying. For this purpose, “activities” generally includes both time and money. Likewise, guidance as to what constitutes lobbying under the insubstantial part test is vague. The insubstantial part test defines lobbying as “carrying on propaganda, or otherwise attempting to influence legislation” and includes any communication that contacts, or urges the public to contact, members of a legislative body for the purpose of proposing, supporting, or opposing legislation or advocates for the adoption or rejection of legislation.
501(h) Expenditure Test
Certain exempt organizations (notably excluding private foundations) can make a so-called 501(h) election. The 501(h) expenditure test provides more generous lobbying limits than the insubstantial part test. A mathematical equation is conducted such that a clear dollar amount that the electing exempt organization may spend on lobbying is established. The limit will vary depending on the size of the exempt organization’s annual expenditures. For example, an exempt organization with less than $500,000 of exempt purpose expenditures can spend up to 20% of its exempt purpose expenditures on lobbying, whereas an exempt organization with more than $17,000,000 in exempt purpose expenditures can spend up to $1,000,000 on lobbying. To adopt this test, an election must be made on the exempt organization’s Form 5786.
Political Campaigns
In addition to the rules for lobbying for legislation, an exempt organization may not participate in, or intervene in, any political campaign on behalf of, or in opposition to, any candidate for public office. An exempt organization may take positions on public policy issues, including issues that divide candidates in an election for public office as long as the message does not in any way favor or oppose a candidate. The message does not need to identify the candidate by name to be prohibited political campaign activity. A message that shows a picture of a candidate, refers to a candidate’s political party affiliations, or contains other distinctive features of a candidate’s platform or biography may be political campaign activity. In addition, an exempt organization cannot make a contribution to a political organization described in Section 527, such as a candidate committee, political party committee, or political action committee (PAC). However, exempt organizations can conduct voter registration and get-out-the-vote drives if they are conducted in a neutral, non-partisan manner without any reference to any candidate or political party. Private foundations are subject to additional restrictions on voter registration drives.
Excise Taxes
Although 501(c)(3) exempt organizations generally can engage in an insubstantial amount of lobbying, any amount paid or incurred by a private foundation to carry on propaganda, or otherwise attempt to influence legislation will be considered a taxable expenditure and will be subject to a hefty excise tax, thus, this generally acts as a lobbying prohibition for private foundations. This excise tax can be assessed at a rate of 20% of the amount expended on the private foundation, an additional 5% on a foundation manager that knowingly agreed to the taxable expenditure, an additional 100% on the private foundation if the expenditure is not corrected within the taxable period, and an additional 50% on a foundation manager if he or she refuses to agree to any part of the correction. Certain other exempt organizations will also be subject to an excise tax on excess lobbying expenditures.
If you have any questions regarding a particular classification of a nonprofit and its applicable rules on lobbying and political campaign intervention, please contact any member of the McGrath North Tax & Estate Planning Practice Group.
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