Exempt organizations other than IRC § 501(c)(3)’s have regulations regarding lobbying and political campaign activities. Organizations that are exempt under IRC § 501(c)(4), (c)(5), and (c)(6) may lobby or engage in political activities without losing their exempt status, however, they may be subject to certain disclosures or proxy taxes when completing their annual Form 990. In 1993, the Omnibus Budget Reconciliation Act amended IRC § 6033 which dictates the requirements placed on these organizations for these two types of activities. These organizations may be required to alert their members of the portion of the dues that are nondeductible or be subject to a proxy tax.

Revenue ruling 61-177 dictates that organizations that are exempt under IRC § 501(c)(4), (c)(5), and (c)(6) do not have any limitations on the extent of lobbying they may participate in as long as those lobbying activities relate to their exempt purpose. Unlike 501(c)(3)’s, these organizations won’t lose their tax-exempt status despite being formed to influence legislation. In addition to lobbying, these organizations may be involved in political campaigns, however, political campaigning may not be their primary activity. The organizations that are exempt from notifying their members regarding the portion of their nondeductible dues are 501(c)(4) veteran organizations or employee associations and 501(c)(5) labor organizations. Other exceptions are:

1. Organizations that have 90% of dues come from other tax-exempt organizations other than 501(c)(4), (c)(5), and (c)(6) organizations (not including 501(c)(4) veteran organizations or employee associations and 501(c)(5) labor organizations) and state and local governments


2. If organizations expend less than $2,000 per year on in-house lobbying expenses and do not make any political campaign expenditures. This exception is the De Minimis Rule


3. Organizations that do not have members


4. Organizations that receive an IRS private letter ruling


5. If members of an organization cannot deduct 90% or more of dues as business expenses regardless of the amount the organization has spent on lobbying

Organizations that are exempt under IRC § 501(c)(4), (c)(5), and (c)(6) that do not meet any of the above exceptions will need to complete Part III on Schedule C in addition to its Form 990 or 990-EZ.

Dues or contributions paid to 501(c)(4), (c)(5), and (c)(6) organizations that do not meet an exception are deductible to the extent that they relate to trade or business expenses as described under US Code Section 162. The portion of dues or contributions used to lobby or on political campaign activities are not eligible to be deductible as trade or business expenses. The organizations must notify their members about the portion of dues that are not deductible. If the organization does not provide notice to its members with this information or chooses not to provide a notice to its members, the organization must pay a proxy tax on its lobbying and political campaign expenditures. The organization will also be subject to a proxy tax if it significantly underestimates the amount of lobbying and political expenditures in its notice to members. The organization will either have to pay a proxy tax on the excess that was not included in the notices, or it may include the excess expenditures in subsequent notices. If organizations elect to pay the proxy tax and to not provide notices to their members on the portion of nondeductible dues then the full member due becomes deductible to the member as a trade or business expense.

Please reach out to the Nonprofit Solutions Group for information on lobbying disclosures, or if you would like more information on how HBK can help you comply with these requirements.

Organizations that are exempt under IRC § 501(c)(3) need to be aware of the restrictions on lobbying activities they may participate in during the year. These organizations cannot have a substantial portion of their activities related to lobbying. A 501(c)(3) will be deemed as lobbying if they put their efforts into or encourage others to influence legislation or contact lawmakers with the intention of influencing legislation. The IRS takes into consideration both lobbying expenses and time spent on lobbying when determining an organization’s level of lobbying activity. An organization is automatically subject to the substantial part test unless they specifically elect for the expenditure test under Section 501(h). Substantial part test The IRS deems an organization as substantially lobbying under the substantial part test if the organization spends a considerable part of its activities lobbying. Whether or not lobbying is substantial depends on the specific facts and circumstances. In general, the IRS will look at the quantitative factors, like the amount of lobbying expenditures incurred during the year, and the qualitative factors, like how much time volunteers or employees spent on lobbying activities. An organization that is engaged in lobbying must file Schedule C with its Form 990 where it provides details of the organization’s lobbying activities. Organizations utilizing the substantial part test will also fill out Schedule C Part II-B. Expenditure test Under Section 501(h), organizations may choose the expenditure test to measure their lobbying expenditures instead of their lobbying activities. Lobbying expenditures for organizations that choose this election may not spend over a certain amount in lobbying expenses each year. The threshold for determining how much an organization can expend is dependent upon the total amount expended for the organization’s exempt purpose each year. For example, if an organization spends less than $500,000 on its exempt purpose, lobbying expenditures can only account for up to 20% of those expenditures. To make the election under Section 501(h), the organization would need to file Form 5768 in the year that they would like the election to apply. Organizations utilizing the expenditure test will also fill out Schedule C Part II-A. The election only needs to be made once and will remain in effect for all future tax years. Conclusion The IRS may revoke an organization’s tax-exempt status if an organization fails its applicable lobbying test. Under the substantial part test, the organization may be subject to income tax in the year it’s determined that the organization conducted substantial lobbying. Additionally, the organization might be subject to a five percent excise tax on those lobbying costs. Under the expenditure test, the organization may be subject to tax if an organization that has elected the expenditure test under Section 501(h) is determined to have excessively lobbied over a 4- year period. The organization may also be subject to an excise tax in any given year that the organization exceeds lobbying expenditures under the expenditure test. Please reach out to the Nonprofit Solutions Group for information on lobbying disclosures, or if you would like more information on how HBK can help you comply with these requirements.