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.
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.
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.