The 501(h) Election: How a 501(c)(3) Measures Its Lobbying

1. What counts as lobbying

The IRS defines lobbying as attempting to influence legislation. An organization lobbies when it contacts, or urges the public to contact, members or employees of a legislative body to propose, support or oppose legislation, or when it advocates adopting or rejecting legislation.

Legislation covers action by Congress, a state legislature, a local council or a similar body on bills, acts and resolutions. It also covers action by the public in a referendum, ballot initiative or constitutional amendment. It does not include action by executive, judicial or administrative bodies.

Educating the public on policy is not lobbying. The IRS says an organization may hold educational meetings, prepare educational materials and consider public policy issues in an educational manner without risking its status.

Sources: IRS, Lobbying

2. The default: the substantial part test

A 501(c)(3) that has not elected is measured by the substantial part test. The IRS looks at all the facts and circumstances, including the time spent by paid staff and volunteers and the money spent on lobbying.

The test has no fixed number, and the penalties are real. An organization that lobbies too much in a year can lose its exemption. It also owes an excise tax of 5 percent of its lobbying expenditures for that year, and managers who knowingly agreed to the spending can owe 5 percent too.

Sources: IRS, Measuring lobbying: Substantial part test

3. The 501(h) expenditure test

Public charities other than churches and private foundations can elect the expenditure test under section 501(h). Lobbying then does not put exempt status at risk as long as lobbying expenditures do not normally exceed the amount set by section 4911. That amount depends on the organization's exempt purpose expenditures and cannot exceed $1,000,000.

Spending over the limit in a year triggers an excise tax of 25 percent of the excess. Form 5768 explains that an organization may lose its exemption if its lobbying expenditures exceed the permitted amounts by more than 50 percent over a 4-year period.

Worked example: a charity with $800,000 in exempt purpose expenditures may spend $100,000 plus 15 percent of the $300,000 over $500,000, which is $145,000 on lobbying. Its grassroots limit is a quarter of that, $36,250.

Sources: IRS, Measuring lobbying activity: Expenditure test; IRS Form 5768 (Rev. September 2016) and instructions

4. Direct lobbying and grassroots lobbying

The regulations split lobbying into two kinds. A direct lobbying communication goes to a legislator, legislative staff, or another official who may help shape the legislation. It counts only if it refers to specific legislation and reflects a view on it.

A grassroots lobbying communication tries to influence legislation by affecting the opinions of the public. It counts only if it refers to specific legislation, reflects a view on it, and encourages the recipient to act. The grassroots nontaxable amount is 25 percent of the overall lobbying nontaxable amount.

A ballot measure is a special case. When a communication refers to and reflects a view on a referendum or ballot initiative, the public in that state or locality counts as the legislature. Sending it to voters there is direct lobbying, not grassroots lobbying.

Sources: 26 CFR 56.4911-1, Tax on excess expenditures to influence legislation (eCFR); 26 CFR 56.4911-2, Lobbying expenditures, direct lobbying communications, and grass roots lobbying communications (eCFR)

5. What turns a message into a call to action

Under the regulations, a communication encourages the recipient to act if it does any of the following. The first three also count as directly encouraging action.

There is an exception for nonpartisan analysis, study or research: a full and fair exposition of the facts that lets readers form their own view. It can take a position. But a communication that directly encourages action on the legislation loses the exception.

• Tells the recipient to contact a legislator or legislative staff.
• Gives a legislator's address, phone number or similar contact details.
• Provides a petition, tear-off postcard or similar way to contact a legislator.
• Names legislators who will vote as opposed, undecided, the recipient's own representative, or on the committee considering the bill.

Sources: 26 CFR 56.4911-2, Lobbying expenditures, direct lobbying communications, and grass roots lobbying communications (eCFR)

6. Making the election

The election is made on Form 5768. The form says the election must be signed and postmarked within the first tax year it applies to. It stays in effect for later years until the organization revokes it. A revocation must be postmarked before the first day of the tax year it applies to.

The IRS pages on both tests point to Schedule C of Form 990, which covers political campaign and lobbying activities.

Sources: IRS Form 5768 (Rev. September 2016) and instructions; IRS, Measuring lobbying activity: Expenditure test

7. Keep records you can add up

Under the expenditure test, the question is how much you spent. That is easier to answer if every lobbying communication is labeled when it goes out, as direct or grassroots, with the staff time and costs that went into it.

Keep a simple log: date, audience, the legislation named, whether it asks people to act, and who worked on it. Review it with your finance lead each quarter, not at year end.

Before your next campaign

Decide which test applies to you, write your limits down, and agree how staff will label lobbying communications before the next legislative session. If you are unsure whether to elect, ask a tax adviser with your budget in front of them.