Lobbying limits for 501(c)(3)s and the 501(h) election

A 501(c)(3) organization is allowed to lobby. The statute only says that "no substantial part" of its activities may consist of attempting to influence legislation. The difficulty is that "substantial" has never been defined with a number. Congress created an alternative in 1976: the 501(h) election, which replaces the vague standard with dollar limits. This guide explains both, so your board can choose with open eyes.

Lobbying is different from campaign activity. Supporting or opposing candidates is banned outright, as explained in political activity rules. Lobbying is about legislation.

What counts as lobbying

Legislation includes bills, resolutions and similar items before Congress, a state legislature, a city or county council or a similar governing body. It also includes measures voted on by the public, such as referendums, ballot initiatives and constitutional amendments. Rulemaking by an executive agency is generally not legislation.

There are two kinds of lobbying:

• Direct lobbying is communicating with a legislator, legislative staff, or another official who may help formulate the legislation, where the communication refers to specific legislation and reflects a view on it. Under the 501(h) rules, urging the public to vote a certain way on a ballot measure is also direct lobbying.
• Grassroots lobbying is trying to influence legislation by affecting the opinions of the general public. Under 501(h), a public message counts as grassroots lobbying only if it refers to specific legislation, reflects a view on it, and includes a call to action, such as telling readers to contact legislators, giving a legislator's contact details, providing a petition or postcard, or naming legislators who will vote or are undecided.

Several activities are not lobbying at all, including:

• making available the results of nonpartisan analysis, study or research, which may take a position if it presents the facts fully and fairly;
• examining and discussing broad social and economic problems;
• providing technical advice in response to a written request from a legislative body or committee;
• "self-defense" communications with a legislative body about matters that could affect your organization's existence, powers, tax-exempt status or the deductibility of gifts to it; and
• certain communications with your own bona fide members about legislation of direct interest to them, unless they urge members to lobby.

Option one: the substantial part test

If you do nothing, your organization is under the substantial part test. The IRS looks at all the facts, including the time spent by paid staff and volunteers and the money spent. There is no safe percentage.

If lobbying becomes substantial, the organization can lose its exemption. Publication 1828 adds that an organization losing exemption this way owes an excise tax of 5% of its lobbying expenditures for that year, and managers who agreed to those expenditures knowing they would likely cause loss of exemption can owe another 5%. Churches must use this test, because they cannot make the 501(h) election (see churches and 501(c)(3)).

Option two: the 501(h) expenditure test

An organization that elects 501(h) measures lobbying only by expenditures, using a formula in Section 4911. Because the test counts money spent, lobbying by unpaid volunteers that costs the organization nothing does not use up the limit.

The sliding scale

The limit, called the lobbying nontaxable amount, is based on your exempt purpose expenditures: the total you spend on your charitable programs, including allocable administrative costs, lobbying and depreciation, but not capital expenditures or costs of a separate fundraising unit.

The result is capped at $1,000,000, which an organization reaches at $17,000,000 of exempt purpose expenditures.

The grassroots limit

Within the overall limit, grassroots lobbying has its own cap: the grassroots nontaxable amount is 25% of the lobbying nontaxable amount. Direct lobbying can use the whole overall limit, but grassroots lobbying cannot exceed its quarter.

What happens if you go over

If you exceed either limit in a year, you owe a 25% excise tax on the excess, reported on Form 4720. If both are exceeded, the tax applies to whichever excess is greater. Exemption is at risk only if the organization normally spends more than 150% of either limit, which the Schedule C instructions measure over a four-year averaging period.

Try your own numbers here:

The 501(h) lobbying limit calculator page explains each input in more detail.

Who can elect, and how

Most public charities can elect, including organizations supported by donations or by fees for services, schools, hospitals and supporting organizations (other than those supporting 501(c)(4), (5) or (6) organizations). Churches, their integrated auxiliaries, and members of an affiliated group that includes them cannot elect, and private foundations are not eligible; see public charity vs. private foundation.

You elect by filing Form 5768, a one-page form signed by an officer or trustee. The election must be signed and postmarked within the first tax year it is to cover, and it applies to that whole year and every later year until revoked. A revocation must be signed and postmarked before the first day of the tax year it applies to.

Reporting on Schedule C

Organizations that file Form 990 or 990-EZ report lobbying on Schedule C:

• Part II-A if a 501(h) election is in effect. You report direct and grassroots spending and the computed limits, and complete the four-year averaging lines. The Schedule C instructions explain that in the first years of an election you complete only the years it has been in effect.
• Part II-B if you have not elected. You answer yes-or-no questions about types of lobbying (volunteers, paid staff, mailings, media, rallies and others) and describe all lobbying activity, whether or not it cost money.

Good records of staff time and costs make either part easier; see nonprofit recordkeeping. Organizations filing Form 990-N do not file Schedule C, but the lobbying limits still apply. More on returns is in annual filing requirements.

501Nonprofit.com is a private company, not the IRS. This page is general information, not legal or tax advice for your organization. Example organizations and figures are hypothetical.