Lobbying. What exactly is it? Lobbying is defined by the IRS as activities that attempt to influence legislation. This includes contacting or encouraging others to contact members and/or employees of the legislature for the purpose of supporting, opposing or proposing legislation or advocating for or against legislation.
The IRS does allow a tax-exempt 501(c)(3) organization to incur some lobbying expenses. However, if it is considered substantial the organization could be at risk of losing its tax-exempt status. Unfortunately, the IRS does not give a clear-cut definition of how much lobbying is too much or excessive. It states that lobbying cannot constitute a substantial portion of the organization’s overall activities. This is known as the substantial part test.
Why is this important? If the IRS determines that, in any taxable year, an organization conducted excessive lobbying (lobbying that is considered to be a substantial portion of the organizations overall activities) the organization may lose its tax-exempt status and all of its income may become subject to tax. Additionally, an excise tax equal to 5% of the lobbying costs incurred for the tax year may be assessed, and the IRS may also impose a tax on the organization’s management.
There is an election that organizations can make which would allow the use of an expenditure test under Section 501(h). This election enables the use of an alternative to the substantial part test mentioned above and provides a means for measuring lobbying activity based on the size of the organization and the lobbying expenditures for the tax year. This method allows organizations to calculate the maximum amount of lobbying costs they can incur per year without jeopardizing their tax-exempt status. Lobbying under the expenditure test may not exceed $1,000,000 in any tax year.
Under the Section 501(h) election if an organization has excess lobbying activities in one year it is subject to an excise tax equal to 25% of the dollar amount of the excess. An organization may lose its tax-exempt status if it engages in excessive lobbying over a four-year period.
A Form 5768 must be filed to elect the expenditure test. The election remains effective for all subsequent tax years unless revoked by the organization. (https://www.irs.gov/pub/irs-pdf/f5768.pdf)
Please contact your Henry+Horne nonprofit adviser with any questions. For more information visit the IRS website at https://www.irs.gov/charities-non-profits/lobbying.