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Can a Georgia Nonprofit Increase its Lobbying?

Taking the 501(h) election typically gives nonprofits more opportunity to lobby

Lobbying can be important to helping fulfill the mission of some nonprofit organizations. But nonprofit organizations are well aware that 501(c)(3) organizations cannot dedicate a substantial part of their overall activities to lobbying—defined by the IRS as attempting to influence legislation. To determine whether the lobbying activity is substantial, the IRS considers a variety of factors, including time devoted by volunteer and compensated workers and the expenditures devoted by the organization to the activity.

That still allows for some lobbying by the organization but the IRS leaves many nonprofits in limbo with no clear definition of what constitutes a substantial part of their overall activities. If the organization slips up and is found to have conducted excessive lobbying activity, it can lose its tax-exempt status, resulting in all income being subject to tax.

The 501(h) election

Instead of facing the uncertainty of the substantial activity test, nonprofits—other than private foundations and churches—can elect to use the expenditure test under IRS section 501(h). Organizations must file IRS Form 5768 – Election to Make Expenditures to Influence Legislation in the year they want to take the election, and the election is good for all following years until revoked by the organization. Under the expenditure test, the extent of the organization’s lobbying activity will not jeopardize its tax-exempt status, provided its expenditures, related to lobbying, do not exceed a percentage of the organization’s total expenditures. The amount of lobbying activity allowed will vary, depending on the nonprofit’s total amount of expenditures. If the organization’s expenditures were an amount:

  • Less than $500,000 annually, the organization can spend 20 percent of that amount on lobbying activity
  • Between $500,000 and $1 million annually, the organization can spend $100,000 plus 15 percent of the amount over $500,000
  • Between $1 million and $1.5 million annually, the organization can spend $175,000 plus 10 percent of the amount over $1 million
  • Between $1.5 and $17 million annually, the organization can spend $225,000 plus 5 percent of the amount over $1.5 million
  • Over $17 million annually, the organization can spend a maximum amount of $1 million on lobbying

Benefits of the 501(h) election

The expenditure test used under section 501(h) is much more clear and easy to calculate versus the undefined substantial part test other 501(c)(3) organizations are subject to. Clear definitions of various kinds of lobbying communications are also provided under section (h). The clearer definitions help organizations distinguish which activities are not lobbying and are allowable advocacy. Because the test is on the organization’s spending, that means volunteer and other efforts that do not cost the organization will not count toward the exhaustion of lobbying limits.

Perhaps most important for nonprofits using the expenditure test is that if the organization is caught engaging in excessive lobbying activity, it is not immediately subject to loss of its tax-exempt status. The IRS won’t consider revoking tax-exempt status unless the organization engages in excessive lobbying activity over a four-year period. However, should the organization exceed its lobbying expenditure dollar limit in a particular year, it must pay an excise tax equal to 25 percent of the excess.

Another bonus is that taking the election also subjects the organization to less annual lobbying reporting requirements when filing the Schedule C to Form 990 each year. However, some larger nonprofits may not benefit from the 501(h) election. To evaluate your organization’s lobbying activity and determine whether the section 501(h) election is right for your nonprofit, speak with an experienced Georgia nonprofit attorney.

For more information on this area, see our business organizations overview and our overview of closely held business.

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