Charitable nonprofit organizations that enjoy tax-exempt status under Internal Revenue Code (IRC) Section 501(c)(3) are subject to strict rules on the amount of legislative lobbying in which they can participate. As a result, charitable nonprofit organizations can only engage in lobbying to the extent that it is an “insubstantial” portion of their overall activities. Unfortunately, the definition of “insubstantial” is unclear, making it challenging for charities to lobby and safeguard their tax-exempt status.
As a result, some charitable organization may find it advantageous to “take the 501(h) election,” an alternative that contains a more objective test to measure the amount of lobbying they can perform. If you have questions or concerns about how your charity can lobby without running afoul of federal tax laws, contact the California Center for Nonprofit Law at (949) 892-1221 today.
Taking the 501(h) Election for Lobbying Expenditure Limits
A charitable nonprofit takes the 501(h) election by filing IRS Form 5768 (Election/Revocation of Election by Section 501(c)(3) Organizations to Make Expenditures to Influence Legislation). The organization can file this form at any point during the tax year for the election to become effective, and the election remains in effect unless it files the same form to revoke it. However, if the charity files a form to revoke the 501(h) election, that revocation will only take effect in the following tax year.
Opting for the 501(h) election sets a definite ceiling on lobbying expenditures that a charitable nonprofit organization can make, as opposed to the subjective “insubstantial” portion of activities test to which the organization otherwise would be subject. This alternative allows charitable organizations to observe specific financial limits on their lobbying activities to maintain their 501(c)(3) status and the penalties they will face if they exceed those limits.
Nonprofit charities should remember that only some organizations can take the 501(h) election. For instance, churches and private foundations are ineligible to take the 501(h) election. Likewise, charitable organizations that receive any federal funding may not engage in any lobbying under existing federal legislation.
Understanding the 501(h) Election
The 501(h) lobbying expenditure limits are based on a sliding scale derived from the charity’s annual exempt purpose expenditures. The expenditure limit can never exceed $1,000,000. Depending on your charitable organization’s annual exempt purpose expenditures, it may be beneficial to take the 501(h) election because your organization can spend more on lobbying activities than it otherwise could.
- The lobbying nontaxable amount for organizations with $500,000 or less in exempt purpose expenditures is 20% of those expenditures;
- The lobbying nontaxable amount for organizations with between $500,000 and $1,000,000 in exempt purpose expenditures is $100,000, plus 15% of those expenditures over $500,000;
- The lobbying nontaxable amount for organizations with between $1,000,000 and $1,500,000 in exempt purpose expenditures is $175,000, plus 10% of those expenditures over $1,000,000;
- The lobbying nontaxable amount for organizations with more than $1,500,000 in exempt purpose expenditures is $225,000, plus 5% of those expenditures over $1,500,000, with a total cap of $1,000,000; and
- The lobbying nontaxable amount for organizations with more than $17,000,000 in exempt purpose expenditures is $1,000,000.
Additionally, no more than 25% of the total expenditures on lobbying can be “grassroots lobbying.” According to the IRS, grassroots lobbying is “attempts to influence legislation by attempting to affect the opinion of the public with respect to the legislation and encouraging the audience to take action with respect to the legislation.“
Exceeding the 501(h) Election
A nonprofit charity that has taken the 501(h) election and exceeds the lobbying expenditure limits outlined above is subject to significant penalties. The organization must pay a 25% excise tax on expenditures exceeding lobbying expenditure limits. Furthermore, exceeding the lobbying expenditure limit set by 501(h) four years in a row can cause the organization to lose its 501(c)(3) status.
Contact Us Today for Legal Assistance
The California Center for Nonprofit Law focuses its practice on legal matters that affect private foundations and other nonprofit organizations in California. This unique focus allows us to concentrate on keeping abreast of the ever-changing laws and policies as they develop over time. We are here to represent the interests of your nonprofit organization throughout every stage of your legal matter. Call us at (949) 892-1221, email us at firstname.lastname@example.org, or fill out our contact form online and schedule a consultation about your nonprofit organization today.