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Lobbying Rules
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All nonprofits are permitted to do limited lobbying. The IRS uses two standards to measure a nonprofit's lobbying activities:
  1. Substantial part test:  By default, nonprofits are governed according to this test.
  2. Expenditure test:  To come under the 1976 lobby law and be measured by this test, nonprofits must take the 501(h) election.

IRS Substantial Part Test vs. Expenditure Test

Substantial Part Test

Until 1976, nonprofits were only allowed to spend an "insubstantial" amount of total expenditures on lobbying, or risk losing their tax exemption.  Unfortunately, lobbying laws did not define "substantial", nor outline clear spending limits.  As such, the substantial part test, vague and lacking defined spending limits, often poses greater risk to nonprofits.

Read more about the substantial part test at www.IRS.gov.

Expenditure Test

The 1976 Lobby Law provides generous and clear spending limits (up to $1 million annually as determined by budget size).  Nonprofits that exceed limits face tax penalties rather than loss of tax-exempt status.  With clear definitions, record-keeping and reporting are less burdensome.  The 1976 law also protects officers and directors from penalties.

To take advantage of the opportunities offered by the 1976 law, nonprofits must take the 501(h) election by filing Form 5768, Election/Revocation of Election by an Eligible IRC Section 501(c)(3) Organization to Make Expenditures to Influence Legislation.  The election may be taken at any time during the tax year for which it is to be effective.  Download Form 5768.

Read more about the expenditure test at www.IRS.gov.


 


Substantial Part Test
Expenditure Test - 501(h) Election
Defining Lobbying
No definitions or exclusions provided
Provides clear definitions with specific exclusions for public policy activities not considered lobbying/included in spending limits
Spending Limits
Spending limited to "insubstantial", but doesn't set forth definition or spending limits
Sets clear, generous limits
Qualifying Expenditures
Expenses and volunteer activities
Only expenses
Record-keeping & Reporting
Need to document all public policy activities and expenses with detailed descriptions, include a classified schedule of expenses paid or incurred on annual Form 990A.
Need to document all lobbying expenses, report numbers only on annual Form 990A.
Penalties for Exceeding Limits
Organization assessed 5% excise tax on all lobbying expenses if "substantial" lobbying results in revocation. Officers/directors subject to 5% tax if "substantial" lobbying deemed willful or unreasonably authorized.
Organization assessed a 25% excise tax on excess limits in a year. No specific liability for officers/directors.
Tax Exemption Revocation
Could occur if "substantial" lobbying occurs in one year
Occurs only if lobbying exceeds 150% of limits over 4 years
Audit Risk
No greater risk of audit
No greater risk of audit

 

Source: Center for Lobbying in the Public Interest

Selecting The Better Option For Your Organization

While the 501(h) election offers nonprofits numerous benefits, it may not be the best option for every organization.  For example, churches and private foundations are not allowed to file the 501(h) election.

Large organizations with large direct lobbying budgets may be ineligible to file, or may find the substantial part test more advantageous.

The 501(h) election is typically best for small- and mid-sized organizations.

Nonprofits should seek professional legal counsel to determine the best solutions for their specific circumstances.

Read more about the 501(h) Election.