The IRS has provided, at best, hazy guidance on the limits allowed for a nonprofit’s lobbying activities — in short, that it be limited to an “insubstantial” part of its overall activity, as our lead article details. Tax practitioners typically take this to mean that lobbying activity totaling less than 5 percent of an organization’s overall activities can safely be considered “insubstantial.”
Unless your organization specifies otherwise, the “insubstantial” test is the default test that you will be subject to. You’ll need to provide a written description of lobbying activities on your organization’s Form 990 — as well as more detailed information on your Schedule C — including accounting for any time that unpaid volunteers have spent lobbying on your behalf.
To opt out of the vague “insubstantial” activity test, nonprofits may make a so-called “501(h) election” by filing IRS Form 5768, Election/Revocation of Election by an Eligible Section 501(c)(3) Organization to Make Expenditures to Influence Legislation.
Under the 501(h) election, your organization will then know upfront the specific dollar limits, calculated as a percentage of total exempt purpose expenditures, that you may spend to influence legislation. The total lobbying expenditure limits under the 501(h) election are:
- 20 percent of the first $500,000 of exempt purpose expenditures
- 15 percent of the next $500,000 of exempt purpose expenditures
- 10 percent of the next $500,000 of exempt purpose expenditures
- 5 percent of the remaining exempt purpose expenditures
- Note that there is a total cap of $1 million for lobbying expenditures.
The 501(h) election provides much clearer guidelines for how much and what types of lobbying you may engage in. The election also carries with it less burdensome reporting requirements. You don’t need to provide a detailed written description of your lobbying activities on Form 990 or count the time of volunteers lobbying on your behalf — just how much you are spending on lobbying per tax year.
In addition, penalties for violating lobbying limits are less severe under the 501(h) election. In fact, the Council of Nonprofits suggests that filing the 501(h) election is, “for the vast majority of nonprofits, the easiest, most effective ‘insurance’ a nonprofit can secure to protect itself from over-stepping IRS limitations on lobbying activities.”
Do you have questions about properly accounting for lobbying expenditures? Contact our office for guidance.