Advocacy & Lobbying

10. Federal Tax Law Limitations 101

Psst . . . 501(c)(3) public charities are generally nowhere near exceeding the federal tax law limits.

Be sure to check out Topic #2 for an overview of the basic lobbying rules (federal, state, local).  Here, we summarize only the federal tax law limitations, but those disclosure rules discussed in Topic #2 are important, too.

Under the U.S. Internal Revenue Code, Section 501(c)(3), public charities are not prohibited from lobbying and, in fact, it’s their constitutional right to engage in activities to influence legislation, but one condition of receiving 501(c)(3) public charity status is that no substantial part of an exempt charitable organization’s activities can be that of carrying on propaganda or otherwise attempting to influence legislation.

What does “no substantial part” mean? Great question, that’s not always been clear. Since the 1934 enactment of the federal lobbying limitation, organizations (and the legal sector) struggled to understand the limits — mostly because no one knew the meaning of “no substantial part.” Congress responded in 1976, and updated regulations followed in 1990, to offer a bright-line test for determining if a Section 501(c)(3) public charity is engaging in a permissible amount of lobbying. Organizations are now either subject to the old default rule, the Substantial Part Test (which is a murky one) or they can choose (by making an “election”) to be measured by the Expenditure Test (which evaluates whether the dollar amount of an organization’s lobbying expenditures exceeds certain spending limits). This election — called the “h” election because it is codified in Section 501(h) of the Internal Revenue Code — is only available to qualifying public charities and is not available to private foundations and churches.

The Expenditure Test is helpful for the clarity it provides and is good enough for most public charities; organizations that have a lot of grassroots lobbying and expenses related to that type of lobbying tend to stick with the Substantial Part Test because the Expenditure Test caps the amount that can be spent on grassroots lobbying.

Quick Overview of the Expenditure Test

The Expenditure Test provides a bright-line numbers test, which involves recordkeeping and doing some basic math. Succinctly put, this test allows eligible 501(c)(3) public charities to annually spend on lobbying a certain percentage of the amounts they are spending to carry out their exempt purposes (i.e., program expenses but not investment management and certain fundraising costs).

There are two ceilings as part of the Expenditure Test: one on total lobbying (i.e., direct and grassroots lobbying), and another specifically limiting how much of the total lobbying can be comprised of grassroots lobbying expenditures. See the chart below, illustrating these two ceilings and how they relate.

Exempt-purpose expenditures
Total Allowable/ Nontaxable Lobbying Expenditures (including any grassroots lobbying)
Amount of Allowable/ Nontaxable Grassroots Lobbying (within the Total Lobbying Expenditures Limit)
≤ $500,000
 20% of the exempt purpose expenditures
 > $500,00 but ≤ $1 million
 $100,000 + 15% of the excess of exempt purpose expenditures over $500,000
One-quarter or, in other words, $25,000 + 3.75% of excess over $500,000
 > $1 million but ≤ $1.5 million
$175,000 + 10% of the excess of exempt purpose expenditures over $1 million
One-quarter or, in other words, $43,750 + 2.5% of excess over $1 million
> 1.5 million but ≤ $17 million
 $225,000 + 5% of the exempt purpose expenditures over $1.5 million
One-quarter or, in other words, $56,250 + 1.25% of excess over $1.5 million
>$17 million
$1 million
One-quarter, up to $250,000

Grassroots lobbying refers to broad public outreach (i.e., not just to members) and an attempt to affect the opinions of the general public (or any segment of the general public) regarding legislation. By contrast, direct lobbying includes communications by the organization directly to legislators and their staff and to executive branch employees who participate in the making of legislation (or by the organization to its members urging them to contact these public officials).

Organizations making the “h” election are permitted to do more direct lobbying than grassroots lobbying, so if an organization does mostly grassroots lobbying — and incurs considerable expenses to do so — it will likely not want to make the “h” election.

Even with these limitations, that’s a healthy annual lobbying allowance, considering most qualifying Pennsylvania public charity nonprofits have annual income that does not exceed $500,000. Being able to spend on lobbying 20% (or somewhere close to 20%) of the amount that the organization spends on its exempt-purpose activities isn’t a meager allowance, especially when considering that — at least for the federal tax law limitation — most of what we might think of as “lobbying” is not really lobbying and is instead considered advocacy, which is not captured by the Expenditure Test.

Organizations can make an “h” election to have their lobbying activities measured by the Expenditure Test by filing the super simple one-page IRS Form 5768. It’s a lifelong election, so there’s no need to renew it. The election can be filed at any time, but it does not take effect until it is filed; and when filed, it applies to the tax year in which it is filed and to all subsequent tax years until it is revoked. The election can be revoked using this same form, though the filing deadline for revocation is before the first day of the tax year to which the revocation applies. Organizations that revoke the election can make it again if they choose to do so.

Regardless of whether they make the “h” election, public charities that lobby must report both the actual and permitted amounts of lobbying expenditures (for direct and grassroots lobbying) on Schedule C of their IRS Forms 990 (or IRS Forms 990-EZ). Schedule C has a section for filers that have made the “h” election and another for those that have not. If an organization does not elect to have its lobbying activities measured by the Expenditure Test, expenditures still likely inform the IRS’s determination of whether the organization’s lobbying activities are substantial. Organizations must use IRS Form 4720 to report any excise taxes on excess lobbying.

Lots of Exclusions

For federal tax law purposes, many expenditures that might intuitively seem like lobbying are, in fact, not considered lobbying activities — at least under the federal tax law rules. (For summaries of other lobbying laws, see Topic #2; be sure to review the definitions of what constitutes lobbying under each of those other laws, as the definition of lobbying varies from statute to statute.) For example, under the federal tax laws, lobbying conducted by volunteers is only considered lobbying if expenditures are made (e.g., to reimburse for travel expenses or to pay for expenses related to conducting a rally). Also, a nonprofit’s communications with its members — if they do not urge them to take action to lobby — is not lobbying, even if the nonprofit voices its position to its members. Providing technical advice and taking a position on pending legislation in response to a written request from a legislative body is also not lobbying. A nonprofit organization making available the results of nonpartisan analysis, study, or research on a legislative issue, is likewise not lobbying; the work product can even take a position on the merits of proposed legislation if it does not contain a call to action (e.g., encouraging readers to contact their legislators) and is a sufficiently full and fair exposition of the pertinent facts to enable the audience to form an independent opinion (and notably, the work product need not be neutral or objective to meet this test). These are just a few of the exclusions under the federal tax laws. For easy-to-read summaries on what does and does not constitute lobbying under the federal tax laws, see Bob Smucker’s The Nonprofit Lobbying Guide, Second Edition (Independent Sector, 1999) and resource materials on Bolder Advocacy’s website.