What Nonprofits Need to Know About the 501(h) Election Expenditure Test

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Nonprofits are prohibited from having a substantial part of their activity devoted to political lobbying. To determine what constitutes a “substantial part,” the IRS uses a “facts and circumstances” test that takes a number of factors into consideration, including the amount of time and money devoted to lobbying (the “substantial part” test).

Nonprofits may opt out of the substantial part test and instead elect the “expenditure test” as outlined in IRC Section 4911. Churches and private foundations do not have the option to use the expenditure test, also known as the 501(h) election. The expenditure test details the level of lobbying expenses permitted by the IRS as calculated using the nonprofit’s exempt purpose expenditures.

This IRS table summarizes the allowable lobbying expenses by nonprofit size:

If the amount of exempt purpose expenditures is:Lobbying nontaxable amount is:
≤ $500,00020% of the exempt purpose expenditures
>$500,000 but ≤ $1,000,000$100,000 plus 15% of the excess of exempt purpose expenditures over $500,000
>$1,000,000 but ≤ $1,500,000$175,000 plus 10% of the excess of exempt purpose expenditures over $1,000,000
>$1,500,000 but ≤ $17,000,000$225,000 plus 5% of the excess of exempt purpose expenditures over $1,500,000
> $17,000,000$1,000,000

Any excesses are taxed at 25% and if a nonprofit exceeds its lobbying expenditure limit for four years, it may lose its tax-exempt status.

Under 26 US Code Section 4911, the following activities are not considered in the definition of “influencing legislation”:

  • Making available the results of nonpartisan analysis, study, or research;
  • Providing of technical advice or assistance (where such advice would otherwise constitute the influencing of legislation) to a governmental body or to a committee or other subdivision thereof in response to a written request by such body or subdivision, as the case may be;
  • Appearances before, or communications to, any legislative body with respect to a possible decision of such body which might affect the existence of the organization, its powers and duties, tax-exempt status, or the deduction of contributions to the organization;
  • Communications between the organization and its bona fide members with respect to legislation or proposed legislation of direct interest to the organization and such members, other than communications described in paragraph (3); and
  • Any communication with a governmental official or employee, other than (i) a communication with a member or employee of a legislative body (where such communication would otherwise constitute the influencing of legislation), or (ii) a communication the principal purpose of which is to influence legislation.

Organizations electing to use the expenditure test must file Form 5768Election/Revocation of Election by an Eligible IRC 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.

The Church Law Center of California assists nonprofits with organization, governance, and risk management. We can help your nonprofit craft policies so it is in a better position to address problems as they arise. To find out how we can help your nonprofit, call us today at (949) 892-1221 or reach out to us through our contact page.

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