June 4, 2019
The presidential election of 2020 is just around the corner. Generally, not-for-profits sit on the political sidelines, but some organizations skirt the boundaries. The stakes for these borderline cases are high: If a nonprofit engages in political campaign activities, it risks its tax-exempt status — and perhaps its very existence.
Here’s what you need to know to avoid trouble.
Prohibited Campaign Activities
If your organization is a tax-exempt organization under Section 501(c)(3) of the tax code, it’s strictly prohibited from engaging in direct political activity. Examples include endorsing candidates for office or donating money to individual campaigns. Groups dedicated to religious, charitable, scientific testing for public safety, literary or educational purposes typically belong in this group.
Section 501(c)(4) organizations, on the other hand, may be involved in some political campaigning as long as it isn’t their primary activity. This category generally includes welfare organizations whose mission is to benefit the community or society, not just the group’s members, their families or other select individuals.
Both 501(c)(3) and 501(c)(4) entities may be subject to tax if they spend money on certain political activities. But there are some gray areas. The IRS states that organizations may not “participate or intervene, directly or indirectly, on behalf of or in opposition to any candidate for public office.” And this requirement generally is open to interpretation.
For example, a candidate for public office can’t speak about the campaign at a function your organization is hosting. However, if other candidates are also invited, politicians can speak about general subjects such as your nonprofit’s charitable mission. The problem for nonprofits is that it’s difficult to ascertain what a candidate will say before an event. So it’s best to err on the side of safety and not invite political candidates to speak at your functions.
When Lobbying is Permissible
The rules for lobbying activity are slightly different. For example, 501(c)(3) organizations may lose their tax exemption if a “substantial part” of their activities is attempting to influence legislation. “Legislation” includes any action by Congress, a state legislature, a local council or similar governing body, regarding acts, bills, resolutions or similar items. It also encompasses referendums, ballot initiatives and constitutional amendments. Actions by executive, judicial or administrative bodies are not included.
There’s no bright-line test for the “substantial part” aspect of the rule. But the IRS has made clear that organizations will be regarded as attempting to influence legislation if they:
- Contact or urge the public to contact members or employees of a legislative body for the purpose of proposing, supporting or opposing legislation, or
- Advocate the adoption or rejection of legislation.
However, organizations may be involved in some public policy issues without risking their tax-exempt status. For example, a not-for-profit might conduct educational meetings, prepare and distribute educational materials or otherwise present public policy issues in an educational manner. If you aren’t sure what action or communication might be interpreted as an attempt to influence legislation, consult a tax advisor before you organize an event or prepare a communication.
“Special Election” Option
Because applying the substantial part test is difficult, nonprofits that engage in more than casual lobbying efforts may choose to be bound by the Section 501(h) election (or “special election”). This option is available to most public charities and 501(c)(3) entities, but not private foundations and churches.
Special election rules provide precise standards for determining whether legislative activities are substantial or not. But in general, an organization electing this status can engage in attempts to influence legislation without jeopardizing its tax-exempt status. Here are some of special election guidelines:
Lobbying expenditures. An organization is permitted total annual lobbying expenditures up to a specified percentage of its tax-exempt-purpose spending. The applicable amount is 20% of the first $500,000 of expenditures, but this percentage is reduced with each successive tier of expenditures.
Spending limits. Regardless of the amount of tax-exempt-purpose expenditures the nonprofit makes, it can’t spend more than $1 million on legislative activities in a single year.
Grassroots amounts. Grassroots organizations can make lobbying expenditures equal to 25% of their lobbying nontaxable amount. The nontaxable limit for any one year is $250,000.
Excise tax. Lobbying expenditures that exceed permissible amounts are subject to an excise tax. This can lead to the loss of an organization’s tax-exempt status.
Adhere to IRS Guidelines
Rules about the political activities of not-for-profits are complex and often open to interpretation. However, your organization can still actively support or oppose legislative efforts if it knows the rules and adheres to them.