IRS Lobbying Rules for 501(c)(3) Charitable Organizations

Background

“Lobbying” has been part of the American vocabulary since the early 1800’s. The most famous early example of lobbying came from President Grant’s administration (1869-1877). Grant frequented the Willard Hotel in Washington and referred to the people who approached him in the lobby for favors as “lobbyists.” This story underscores the fact that direct lobbying and grassroots lobbying, have long been an important and accepted part of our political process. Many of the changes we need to see in this country for individuals with Down syndrome will only happen through legislation. Groups that are opposed to the changes we seek will use lobbying in their efforts to defeat the legislation and regulations we support. Therefore, it is essential that NDSS affiliates use lobbying as a tool to ensure that the voices of individuals with Down syndrome and their family members are also heard at the local, State and Federal levels.

Direct Lobbying occurs when an organization states its position on specific legislation to legislators or other government policy makers or urges its members to do so, for the purpose of influencing the legislation. Grassroots Lobbying occurs when an organization states its position on specific legislation to the general public and asks the general public to contact legislators or other government policy makers for the purpose of influencing the legislation. The main difference between these two types of lobbying is the audience. In direct lobbying the organization is directly communicating with the policymakers or is communicating to its members. In grassroots lobbying the organization is communicating with the general public. The term “legislation” refers to an action voted on by a legislative body including county or town Councils. It does not refer to actions by administrative bodies like school boards or State and Federal departments.

Rules that Limit Lobbying for 501(c)(3) Charitable Organizations

Since most affiliates are 501(c)(3) charitable organizations, it is important to understand the limitations that the U.S. tax code puts on the amount of their lobbying activities. Taxes and the possible loss of 501(c)(3) status are the consequences for violating these limits. An affiliate that needs help with these rules should contact an accountant who is familiar with 501(c)(3) charitable organizations. Charitable organizations may choose one of two tests for determining the allowable amount of lobbying activities: (1) no substantial part test, or (2) the 501(h) expenditure test. Both of these options are discussed below. Generally, the benefits of using the 501(h) expenditure test significantly outweigh any disadvantages.

1. No Substantial Part Test
The Internal Revenue Service (IRS) will use the “no substantial part of its activities” test to determine whether a charitable organization exceeded an allowable amount of lobbying, unless the charitable organization selects the 501(h) expenditure test. The IRS uses the “no substantial part test” to decide whether lobbying is a substantial (fairly large) part of the organization’s activities. The IRS looks at a lot of factors, including the time spent lobbying by both paid and volunteer workers and the money spent on lobbying by the organization. The Courts have interpreted this test in a variety of ways, making it very difficult to know if the amount of lobbying your organization does is permitted. The 501(h) test was developed as an alternative.

2. Section 501(h) Expenditure Test
Selecting the 501(h) test requires a one-time filing of IRS Form 5768, at any time during the tax year. Once this is done the 501(h) test will apply for that whole tax year. The organization should keep a copy of the Form 5768 because the IRS ordinarily will not acknowledge receipt. The 501(h) election allows an organization to spend up to a defined dollar limit on lobbying. This dollar limit is a percentage of the organization's expenditures. The 501(h) expenditure (expense) test only considers the money spent by the organization on lobbying. Therefore, lobbying by volunteers will not be counted under the 501(h) expenditure test. This is an important point for affiliates to note. Most affiliates do not have paid staff to do lobbying activities. The limitations on lobbying expenses are not likely to be a problem for affiliates since they generally have expenses for many activities in addition to lobbying that will balance out any lobbying expenses.

Charitable organizations may spend:
• 20% of the first $500,000 of its expenditures and 15% of the next $500,000, and so on, up to one million dollars a year spent on Direct Lobbying
• 5% of the first $500,000 of its expenditures and 3.75% of the next $500,000, and so on, up to $250,000 a year spent on Grassroots Lobbying.  These rules allow an organization to spend one-fourth as much on grassroots lobbying, as on direct lobbying.

It is clear from the amount of money that is referenced in these rules that the IRS is mostly interested in discouraging excessive lobbying by large and wealthy charitable organizations. The focus is not on the small organizations, although they still must follow the rules.

Any charitable organization that lobbies must put in place an accounting system to track lobbying expenses. However, the requirements are much more manageable under the 501(h) test. For example, lobbying expenses that must be tracked under 501(h) include direct costs -- such as copying costs or travel expenses for a lobbying trip -- as well as staff time and overhead expenditures. The accounting system should be put in place at the beginning of the tax year in which the 501(h) test is selected and the organization must report its lobbying expenses on IRS Form 990 every year.

These requirements are less burdensome than they sound for small organizations like most affiliates. In fact, the only lobbying expenses most affiliates are likely to have are printing costs for any lobbying materials (e.g. putting links to NDSS alerts in their newsletter). This is a nominal expense and one that has great potential benefit because it greatly increases the number of emails that will be sent to Congress. Some affiliates also may pay transportation costs and other expenses for their volunteer lobbyists and may have some overhead associated with these activities. Only the affiliates that have paid staff are going to have more complicated lobbying expenses to track and report. The bottom line is that the benefits that individuals with Down syndrome will enjoy as a result of direct and grassroots lobbying by NDSS affiliates far outweigh the effort it takes to comply with the IRS rules for charitable organizations.

Primary Sources:
Handouts from “The Independent Sector”
• “Lobbying by Public Charities: An Introduction” by Rosemary E. Fei
• “Advocacy Tips for Non-Profits”
IRS article http://www.irs.gov/pub/irs-tege/eotopicp97.pdf