There’s a common misconception for people to believe that nonprofits should not be lobbying, however, this is not the case. In fact, all nonprofits, including 501(3) organizations, are legally allowed to lobby, as long as it does not account for a substantial part of the organization’s activities. The ability to lobby can be critical to many nonprofits, as it gives the organization a voice in law or policy discussions that can potentially impact the organization, the environment in which it operates, and the communities that it is working to serve. Very often, nonprofits that serve communities will have a better idea of which policies or services will have the greatest impact on the people living in those communities. When nonprofits ignore their right to lobby, they may be forfeiting opportunities to further their mission and improve the communities that they serve.
Lobbying has been defined as “attempting to influence legislation and government leaders to create legislation or conduct an activity that will help a particular organization”. Attempting to influence legislation includes contacting or urging the public, within the communities serviced by the nonprofits, to contact a legislative body in an attempt to support the adoption or rejection of legislation. For a communication made by a nonprofit to be considered lobbying it must refer to, and reflect, a view on a specific legislative proposal or a piece of legislation that has been introduced before a legislative body.
Although all nonprofit organizations are permitted to lobby to some extent, 501(c)(3) organizations are absolutely not permitted to participate in, or intervene in any political campaign on behalf of any candidate for public office. Included in the acts that 501(c)(3) organizations are not permitted to participate in are endorsing candidates, making donations to candidates, making general statement of support or opposition related to any candidate, and the use of the organizations resources to support or oppose a candidate or party.
It’s important to note that 501(c)(3) organizations are only permitted to lobby up to a certain amount each year. These organizations are limited to a certain amount of lobbying expenses they may incur annually, since they receive preferential tax treatment: they are tax exempt and contributions to them are tax deductible. As a result, 501(c)(3) organizations must follow the guidelines detailed in the “substantial part” test to determine the annual amount of allowable lobbying expenses or activities. This is the method most often utilized by 501(c)(3) organizations, and under this method, the determination of whether the lobbying activities of an organization are “substantial” can be based on the percentage of expenditures devoted to lobbying (money) or the percentage of the organization’s activities that represented lobbying (time). Unfortunately, the IRS has not offered clear guidance as to what amount would be considered a “substantial” amount of lobbying. Due to the uncertainty over how much lobbying would be considered substantial, 501(c)(3) organizations have followed precedents set by court decisions stating that lobbying expenses or activities that represent 5% or less of an organization’s budget or activities are considered to be insubstantial. Organizations engaged in lobbying which exceeds the 5% limit face the penalty of losing their tax-exempt status.
Rather than relying on the somewhat unclear terms of the “substantial part” test, 501(c)(3) organizations can elect to lobby under section 501(h) of the Internal Revenue Code. Organizations that make this election are covered by a much more detailed set of rules. Under the 501(h) expenditure test, lobbying occurs when there is an expense incurred by the 501(c)(3) organization for the purpose of attempting to influence legislation. For 501(c)(3) organizations that have elected the 501(h) provision, lobbying expenses are not considered to be substantial unless the nonprofits spending exceeds the following amounts:
Additionally, it’s worth noting that any federal funds received, either through a grant or a contract can’t be used for any type of lobbying. This holds true for many other funding sources also, so you should verify before spending any government funds on lobbying.
There are two types of lobbying expenditures included in the calculation of lobbying expenses under section 501(h) election: direct lobbying and grassroots lobbying. Direct lobbying includes any attempt to influence legislation through communication with a member or employee of a legislative body, or with any other government official or employee who participates in the design of legislation. Also, included is the communications made by an organization to its members encouraging them to participate in lobbying. Grassroots lobbying includes any attempt to influence legislation through an attempt to affect the opinions of the general public.
Lobbying can be an extremely useful form of advocacy that has the potential to help all nonprofits accomplish their missions. Organizations should work to overcome the negative perception of the subject, take the time to completely understand lobbying and its many implications, and then make educated decisions as to whether or not it can be a useful tool.
Tania Quigley, CPA
Tania Quigley has been a member of Cerini & Associates’ audit and consulting practice area for ten years where she focuses on serving the firms nonprofit and employee benefit plan clientele. Tania has experience in performing financial statement audits and reviews, tax return preparation, cost report preparation and filing, retirement plan audits, and other consulting. Tania brings her expertise, diversified background, and helpful approach to all of her engagements.