Fried & Davis - Lobbying and Political Activities

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What is the substantial part test for lobbying activities?

The Internal Revenue Code does not allow tax exempt charitable organizations to attempt to influence legislation to the extent that the lobbying activities are a substantial part of their total activities.

What happens when a nonprofit organization engages in substantial lobbying?

The organization is supposed to have its tax exemption revoked. The organization is also liable for a 5% excise tax on the lobbying expenditures. A 5% tax may also be levied against managers of the organization who were responsible for the loss of the organization's tax exempt status due to engaging in substantial lobbying. Usually, the IRS does not impose the excise taxes, instead making the organization agree not to engage in substantial lobbying in the future using what the IRS terms a closing agreement.

What percentage of its annual budget can a charity expend on lobbying activities?

A good rule of thumb is that a public charity should keep its annual outlays for lobbying to a level below 10% or 15%.

How does the Expenditure Test work?

The Expenditure Test allows charities to expend, for lobbying, 20% of its first $500,000, 15% of the next $50,0000, 10% of the next $500,000 and 5% of the remaining expenditures. There is an annual ceiling of $1 million for lobbying. Grass roots lobbying may not exceed 25% of the total available to lobbying. These percentages are applicable to the organizations expenditures during the most recent four years.

How does an organization elect to come within the Expenditure Test?

This is done by filing an IRS Form 5768. This filing can be made at any time during the fiscal year. Note that churches are not permitted to elect the Expenditure Test.

Why should a charitable organization elect the Expenditure Test?

It gives the public charity certainty as to how much lobbying it can engage without running afoul of the IRS. Another advantage is that lobbying done by volunteers is not included in the calculation for lobbying. Only expenditures are considered. Some activities that are arguably of a lobbying nature are also exempted from consideration of lobbying activities.

Why shouldn't a charitable organization elect the Expenditure Test?

There is a stringent limitation on grass roots lobbying to 25% of total allowable lobbying activities. There are also extensive reporting requirements and limitations on the ability to convert to a tax exempt social welfare organization if lobbying activities exceed that allowed under the test.

Can private foundations lobby to influence legislation?

No. Private foundations are not allowed to engage in any lobbying.

Can charitable organizations back a particular candidate for office?

No. A charitable organization is not allowed to participate in or intervene in any political campaign on behalf of or in opposition to any candidate for public office.