With midterm elections right around the corner, everyone is getting bombarded with political ads. Everywhere you look, someone is telling you who, or what to vote for. But, one group that is not permitted to create these ads are tax-exempt charity nonprofits under Section 501(c)(3) of the Internal Revenue Code. These nonprofits are restricted when it comes to politics. Nonprofits could face losing their tax-exempt status if they do not comply with IRS regulations restricting their political advocacy. So this month, we touch on the basics of how charity nonprofits can stay tax-exempt while still sharing a political purpose.
Advocacy is a way for organizations to assert their views on issues in an attempt to influence others. A 501(c)(3) non-profit is permitted to advocate on most issues, but in a limited manner. A 501(c)(3) is prohibited from encouraging or discouraging the election of candidates, as well as in how much they can advocate for the passage of a certain bill or referendum. These acts are called candidate election advocacy and legislative advocacy.
Candidate Election Advocacy
A 501(c)(3) is strictly prohibited from engaging in is election advocacy. The tax code even defines a 501(c)(3) nonprofit as an organization “which does not participate in, or intervene in … any political campaign on behalf of (or in opposition to) any candidate for public office.” Basically, this means that nonprofits may not endorse, support, or disapprove of a specific candidate. Therefore, it seems pretty explicit that an organization cannot show support for a specific candidate.
However, there is some wiggle room in this restriction. For instance, an organization may educate their members on voting history. But, they cannot focus on a specific candidate, and especially not during an election year. Also, the organization’s members may engage in their own candidate advocacy as long as they are doing so on their own time, under their own name, and the non-profit is not affiliated with the actions in any way.
Nevertheless, this is a strict prohibition. If an organization is thought to be advocating for a candidate it may result in the loss of its tax exempt status. So, to avoid that headache, it’s probably best to err on the side of caution and not spend any time talking about the candidates themselves, but rather on the issues, or legislation.
On the other hand, a 501(c)(3) is permitted to engage in some legislative advocacy, which is also known as lobbying. Legislation is a very broad category. It can include anything from a state referendum to the passage of a bill. Also, it can include anything from a local government to the national congress. Generally, it includes any governmental policy that will be voted on, no matter who is voting on it.
However, a 501(c)(3) may only engage in lobbying so long as it is not a “substantial part” of the non-profit’s activities. But, determining what is a “substantial part” is still a murky test. The “substantial part” test considers both how much time and money an organization puts into lobbying, and other facts relevant to the use of the organization’s resources. With this test, there is no clear line for when an organization’s lobbying becomes a substantial part. And with tax-exemption and other penalties on the line, it’s a hard line to toe.
One way a nonprofit can avoid the uncertainty of the “substantial part” is to file a 501(h) election form. This form allows for the measurement of a 501(c)(3)’s lobbying activities to be based on the amount of money spent on lobbying rather than “substantial activities.” This narrows the consideration for determining if a 501(c)(3) is in compliance with lobbying laws to if the amount of money spent on lobbying is “substantial” in relation to the non-profit’s budget, which is based on a predetermined chart put out by the IRS, which can be found: here. This is a lot simpler standard with less variables and is often the choice for non-profits who have some lobbying as part of their mission.
Another important difference between the “substantial part” test, and the 501(h) election is that it will be quicker to lose your tax-exempt status through the “substantial part” test. This is because, if an organization under the “substantial part” test is found to be engaging in legislative advocacy substantially, the 501(c)(3) may immediately lose its tax-exempt status. Further, under the “substantial part” test, the managers of the organization may be subject to penalties. However, if under the 501(h) election, the organization will have four years to correct its spending to ensure that it is below the “substantial part” amount before the organization will be subject to losing its tax status. But, even with a 501(h), if you exceed the limit on lobbying for one year, the excess spent is subject to a 25% excise tax. There are risks and benefits to both options.
Again, however, the line on lobbying is if an organization is advocating directly for or against a particular piece of legislation that will be voted on by an elected body. An organization can put out informational materials about legislation and educate the public or encourage people to “vote” or “contact their representative” so long as the organization does not encourage citizens, candidates, or elected officials to vote a certain way. This Guide provides good guidance on understanding what is lobbying and how it is considered.
We hope this overview provides some guidance on lobbying for non-profits, but it is important that an individual organization researches and/or consults with an attorney to understand their lobbying parameters and if a 501(h) election may be right for them.
This blog is meant for informational purposes only and not be relied upon for individual legal advice. Please consult an attorney for your specific situation.