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September 24, 2020
IRS Form Protects Nonprofits from Lobbying Penalties
Form 5768
Nonprofits wary of federal rules indicating that they may spend only an “insubstantial” amount of their activities on lobbying can be protected by completing an IRS form that provides protection from penalties.

Although federal rules have long allowed 501(c)(3) organizations to lobby, the government’s hazy definition of “substantial” made many organizations curb their activities to keep from inadvertently crossing the line.

Now, however, nonprofits that file IRS Form 5768—also referred to as "taking the 501(h) election"—won’t be judged by the vague “substantial part” test that evaluates undefined activities. Instead, they’ll be evaluated with the “expenditure” test, which offers a bright line based on the amount of money the nonprofit spends on its lobbying activities.

Under the expenditure test, the extent of an organization’s lobbying activity will not jeopardize its tax-exempt status, provided its expenditures, related to such activity, do not normally exceed specified limits, which are generally based upon the size of the organization. See the table below.

If the amount of exempt purpose expenditures is: Lobbying nontaxable amount is:
Less than $500,000 20% of the exempt purpose expenditures
More than $500,00 but less than $1,000,000 $100,000 plus 15% of the excess of exempt purpose expenditures over $500,000
More than $1,000,000 but less than $1,500,000 $175,000 plus 10% of the excess of exempt purpose expenditures over $1,000,000
More than $1,500,000 $225,000 plus 5% of the exempt purpose expenditures over $1,500,000

An organization that fails the expenditure test and is found to be engaged in excessive lobbying activity over a four-year period may lose its tax-exempt status, making all of its income for that period subject to tax. Should the organization exceed its lobbying expenditure dollar limit in a particular year, it must pay an excise tax equal to 25% of the excess.

The National Council on Nonprofits agrees that the 501(h) is the “easiest and best insurance on the planet.” Once a nonprofit files the 501(h) election by completing Form 5768, it simply uses Form 990, Schedule C, to report the amount of money spent during the year on lobbying activities.

Organizations electing to file the 501(h) election must submit Form 5768 (titled “Election/Revocation of Election by an Eligible Section 501(c)(3) Organization to make Expenditures to Influence Legislation”) at any time during the tax year for which it is to be effective. The election remains in effect for succeeding years unless it is revoked by the organization.

What is Lobbying?
According to the IRS:

In general, no organization may qualify for section 501(c)(3) status if a substantial part of its activities is attempting to influence legislation (commonly known as lobbying). A 501(c)(3) organization may engage in some lobbying, but too much lobbying activity risks loss of tax-exempt status.

Legislation includes action by Congress, any state legislature, any local council, or similar governing body, with respect to acts, bills, resolutions, or similar items (such as legislative confirmation of appointive office), or by the public in referendum, ballot initiative, constitutional amendment, or similar procedure. It does not include actions by executive, judicial, or administrative bodies.

An organization will be regarded as attempting to influence legislation if it contacts, or urges the public to contact, members or employees of a legislative body for the purpose of proposing, supporting, or opposing legislation, or if the organization advocates the adoption or rejection of legislation.

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

Nonprofits that receive federal funds through contracts or grants may not use those funds to attempt to influence any federal or state legislation, through direct or grass roots lobbying campaigns.

Passing the “Substantial” Test
If a 501(c)(3) does not file Form 5768, the IRS requires more detailed reporting and will decide, based on uncertain criteria, whether the charitable nonprofit’s lobbying activities are “substantial” or not.

The IRS explains, “Whether an organization’s attempts to influence legislation, i.e., lobbying, constitute a substantial part of its overall activities is determined on the basis of all the pertinent facts and circumstances in each case.”

It considers a variety of factors, including the time devoted—by compensated and volunteer workers—and expenditures devoted by the nonprofit to the activity.

Failing the “substantial” test brings harsh penalties. An organization deemed to be conducting excessive lobbying in any taxable year may lose its tax-exempt status, resulting in all of its income being subject to tax.

In addition, section 501(c)(3) organizations that lose their tax-exempt status due to excessive lobbying, other than churches and private foundations, are subject to an excise tax equal to 5% of their lobbying expenditures for the year in which they cease to qualify for exemption.

Private foundations are subject to a different set of taxes on their lobbying expenditures; churches are not subject to excise taxes on excessive lobbying. Neither may elect to file Form 5768.

January 2011
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