By Richard W. Lewis, CPA, CFE | Business Assurance & Advisory Services Partner | Not-for-Profit Team
Corporations across a wide spectrum of sectors and industries spend billions of dollars each year on lobbying activities. Through August 28, 2018, calculations of such spending from the Center for Responsive Politics based on data from the Senate Office of Public Records puts current year spending at 1.76 billion dollars. The same data put spending on lobbying by not-for-profit organizations at 28 million dollars. With the increased engagement throughout the United States on advocacy, the current spending across all sectors, including not-for-profit organizations, will likely rise. Because certain not-for-profit organizations, specifically public charities and foundations, are limited by the Internal Revenue Service (IRS) as to the amount of lobbying activities in which they can participate, knowing where to draw the line on such activities and the risk it poses is very important.
The general rule for public charities exempt under IRS code section 501(c)(3) in regard to lobbying activities is in order to maintain tax-exempt status, a public charity cannot have a substantial part of its activities consist of carrying on propaganda, or otherwise attempting, to influence legislation. Lobbying in a substantial way will result in the public charity being considered an “action organization” which will no longer qualify as a tax-exempt organization under Internal Revenue Code (IRC) section 501(c)(3).
“…the line between an “insubstantial” and a “substantial” amount of legislative lobbying activities is hazy at best”
Measuring Lobbying Activity
So what constitutes “substantial” or “insubstantial” within the IRC? A definition of either term has not been provided by Congress or the IRS, and the line between an “insubstantial” and a “substantial” amount of legislative lobbying activities is hazy at best, especially because it depends on how the IRS retroactively weighs the “facts and circumstances” of each situation. The IRS does provide two alternative tests to determine if the public charity is in compliance with the lobbying rules. A brief summary of these tests are as follows:
- Substantial part test – Using this test, lobbying is permitted as long as it is insubstantial, which is a facts and circumstances test and includes all activities regardless of whether expenses are incurred.
- Expenditures test – Using this test, lobbying is permitted as long as a public charity does not spend more than 20 percent of its annual expenditures on such activities, including no more than 5 percent of its annual expenditures on grassroots lobbying. The expenditures test can be elected by filing a 501(h) election.
The expenditure test has great advantages over the more uncertain substantial part test. In the opinion of informed attorneys and accountants, filing the 501(h) election is, for the vast majority of public charities, the easiest, most effective “insurance” a public charity can secure to protect itself from overstepping IRS limitations on lobbying activities.
The general rule for foundations is contingent upon the type of foundation. Private foundations may not lobby or earmark funds to support lobbying, but may provide grants to public charities that lobby. Community or public foundations may lobby and earmark grants specifically for lobbying; however, such grants will count against the foundation’s lobbying limit under the substantial part test or expenditures test.
Grassroots Lobbying vs. Direct Lobbying
Lobbying primarily takes two forms: grassroots lobbying and direct lobbying. Grassroots lobbying is an effort to affect the opinions of the general public or any segment of the general public. Direct lobbying is communication with any member or employee of a legislative body or with any government official or employee who may participate in the formulation of legislation. Lobbying is never participating or intervening in any political campaign on behalf of or in opposition to any candidate for an elective public office, which is a prohibited activity for public charities exempt under IRS section 501(c)(3).
While many do not realize it, most not-for-profit organizations may freely engage in legislative lobbying as long as that activity amounts to only an “insubstantial” amount of the not-for-profit organization’s activities. In today’s political environment, fewer and fewer individuals are remaining silent on matters that they are passionate. There are many ways the general public make their position known from traditional rallies and organized protests to social media platforms. At some point in the not to distant future, it could potentially become part of a donor’s evaluation of where to donate. Thus, all not-for-profit organizations need to understand the rules and how to operate within them.
Additional Not-for-Profit Resources:
- Clarifying the Scope and Guidance for Contributions Received and Made
- Not-for-Profit Financial Statements: New Liquidity and Availability Disclosures Required
- Financial Statements for Not-for-Profits: Changes to Net Asset Classifications (Part II)
- Not-For-Profit Functional Expense Reporting: Management and General
- Changes to Contributor Disclosures on Form 990
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.