Lobbying and 501(c)(3)’s

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.

Please indicate the industry that your company operates in: *

About the Author(s)

Ashlynn is a Senior Manager in the HBK office in Naples, Fla. She serves as Assistant Director in the HBK Nonprofit Solutions Group, as a Tax Specialist in the firm’s Tax-Exempt Organizations Tax Specialists Group, and is a resource for the firm at large as it relates to nonprofit engagements. During her career she has worked closely with small to mid-sized local businesses and their owners, high net worth individuals, trusts, and estates. Through her work with nonprofit organizations, she found a way to combine her passion and her profession. She has specialized her knowledge in nonprofit tax reporting, operations, and consulting, and through her role as Assistant Director of the Nonprofit Solutions Group she has helped initiate firm-wide policy, trainings, and guidance related to serving nonprofit organizations. For more information, contact Ashlynn at 239-263-2111 or areeder@hbkcpa.com

Teal is a Manager in the HBK office in Sarasota, Fla. She specializes in tax preparation and assurance services for nonprofits and leads the firm’s Tax-Exempt Organizations Tax Specialists Group. Additionally, she does tax preparation for individuals, businesses, trusts, and estates, and has experience with employee benefit plans and the construction and manufacturing industries. As a part of HBK’s REVEAL team, she oversees recruiting efforts for the Sarasota office. Teal began her accounting career with HBK in 2016. For more information, contact Teal at 941-957-4242 or tstrammer@hbkcpa.com.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

RECOMMENDED ARTICLES