Not-for-profit organizations, which are typically also tax exempt, play a vital role in communities throughout the United States on both a local and national level. In many instances, they are the front line for serving and protecting the most vulnerable in our society. From this perspective, non-profits are in a unique position to obtain a wide array of information that is useful in determining what we need as a city, state, or even country. This data and information collected by non-profits is particularly valuable in the arena of public policy as it has the potential to impact policy in a positive way to benefit the organization and the populations that they serve. However, a common misunderstanding of the federal law that limits tax exempt organizations' ability to affect government legislation often results in tax exempt organizations completely avoiding engaging public policy in fear of losing their tax exempt status.
In order to move beyond this misunderstanding, it is important for all non-profits–specifically 501(c)3 organizations–to be aware of their ability to impact change in the government without losing their tax exempt status. 501(c)(3) organizations are exempt from paying income tax, and are eligible to receive tax free donations from individual donors. With these benefits comes special restrictions on lobbying and advocacy, among other things. Some of these restrictions on advocacy are somewhat difficult to navigate, while others are very straightforward. One straightforward restriction prohibits 501(c)(3) organizations from endorsing a political candidate or supporting a candidate through participating in certain campaign activities. In addition to this restriction on support of political candidates, federal regulations provide that in order for a non-profit organization to maintain its tax exempt status, lobbying must not consume a “substantial part” of its overall activities. This restriction has caused many non-profits to shy away from advocacy activities and lobbying.
The IRS defines lobbying as an attempt to influence legislation. It defines legislation as any "action by Congress, any state legislature, any local council, or similar governing body, with respect to acts, bills, resolutions, or similar items (such as legislative confirmation of appointive office), or by the public in referendum, ballot initiative, constitutional amendment, or similar procedure. It does not include actions by executive, judicial, or administrative bodies." Actions that involve attempting to influence legislation, must not make up a substantial part of a 501(c)(3)'s activities.
Under the federal regulations, there are two ways to measure an organization's lobbying efforts; the substantial part test and the 501(h) expenditure test. The substantial part test is the default test for all 501(c)(3) organizations, but does not provide clear guidance to non-profit organizations as to what amount lobbying activity might jeopardize 501(c)(3) status. It is a survey of the organization's total activities and under it the IRS makes a case-specific determination as to whether an organization’s lobbying activities constitute a substantial part of its overall activities based on a consideration of all of the “pertinent facts and circumstances.” Several commentators suggest that less than 5% of all activity may be deemed insubstantial, but the IRS has not provided a clear definition of what constitutes “excessive lobbying activity” under the substantial part test.
As an alternative to the substantial part test, all 501(c)(3)s have the option of electing to use the 501(h) expenditure test to measure lobbying activity. To make that election, a non-profit organization must file a Form 5768 with the IRS. Unlike the substantial part test, the expenditure test provides clear guidelines for the amount of money that an organization may spend on lobbying activities. The permissible amount of money that a 501(c)(3) organization may spend on lobbying activities depends on the amount of money spent on activities related to its tax exempt purpose. To view the exact dollar amounts permitted, view the IRS's chart here.
Although 501(c)(3) non-profit organizations certainly need to tread carefully when engaging in lobbying, they can play a vital role in the public policy arena.[KLC1] Advocacy is not limited to lobbying, and presents a way for 501(c)(3)’s to partake in public policy more liberally. Some examples of advocacy include any activity that is centralized around education without opinion or bias such as educational meetings and distributing informational material. In addition to your limited lobbying efforts, you may employ these methods to continue to use your expertise to help people and have your voice heard.
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