Nonprofits, Lobbying and You

Nonprofits, Lobbying and You
by Bunnie Riedel, Host of Nonprofit Conversation


I cannot tell you how often I speak with people who believe that nonprofit 501 (c)3 organizations are prohibited from direct lobbying at the local, state or federal levels. They fear that if they lobby they will lose their tax-exempt status. While there are limits on the amount of direct lobbying a nonprofit can do, they certainly can and should lobby.

The IRS has two tests for measuring direct lobbying: one is the “substantial part” test and the other is the “expenditure test.” Let me dissect these two.

The “substantial part” test is a highly vague measurement of how much time you and/or your volunteers spend on lobbying. It also takes into account expenditures, but offers no real guidance on what “substantial” really means and can be wide open for interpretation depending on which IRS agent has audited your tax return, seriously, I am not kidding on that. In the past the IRS has said that substantial is 5% to 15%, time and money, and they can come down at the low end or high end or somewhere in between.

This uncertainty has vexed nonprofits for years, and frankly scared the living daylights out of them because nobody wants to lose their hard sought tax exempt status. However, if you are ever in the Washington D.C. area and you take notice of the name plates on many buildings or office spaces, you will notice that D.C. is filled to the gills with nonprofits and associations who have headquarters in D.C. for the very purpose of lobbying. And most of those organizations have a 501 (c)3 designation, not a 501 (c)4.

However, the IRS does provide certainty in the “expenditure” test. I call it the “H” designation and basically what you have to do is fill out a very simple form, form Form 5768 and file it with the IRS. It’s like the IRS is saying to nonprofits “If you will just tell us that you are going to lobby, we will give you the guidelines and take the guess work out of your reporting.”

The following is from the IRS’s website:

Measuring Lobbying Activity: Expenditure Test

Organizations other than churches and private foundations may elect the expenditure test under section 501(h) as an alternative method for measuring lobbying activity. Under the expenditure test, the extent of an organization’s lobbying activity will not jeopardize its tax-exempt status, provided its expenditures, related to such activity, do not normally exceed an amount specified in section 4911. This limit is generally based upon the size of the organization and may not exceed $1,000,000, as indicated in the table below.

If the amount of exempt purpose expenditures is: Lobbying nontaxable amount is:

≤ $500,000                                          20% of the exempt purpose expenditures

>$500,00 but ≤ $1,000,000                $100,000 plus 15% of the excess of exempt purpose expenditures
over $500,000

>$1,000,000 but ≤ $1,500,000          $175,000 plus 10% of the excess of exempt purpose expenditures over $1,000,000

>$1,500,000                                      $225,000 plus 5% of the exempt purpose expenditures over $1,500,000

Organizations electing to use the expenditure test must file Form 5768, Election/Revocation of Election by an Eligible IRC Section 501(c)(3) Organization to Make Expenditures to Influence Legislation, at any time during the tax year for which it is to be effective. The election remains in effect for succeeding years unless it is revoked by the organization. Revocation of the election is effective beginning with the year following the year in which the revocation is filed.


Under the expenditure test, an organization that engages in excessive lobbying activity over a four-year period may lose its tax-exempt status, making all of its income for that period subject to tax. Should the organization exceed its lobbying expenditure dollar limit in a particular year, it must pay an excise tax equal to 25 percent of the excess.

In other words, if you have an organization whose exempt purpose expenditures are less than or equal to $500,000 you can spend 20% of that on direct lobbying. And the amounts go up depending on expenditures and are capped at $1,000,000 for direct lobbying.

This designation gives nonprofits a lot of leeway to do what it is they should be doing and that is advocating for their cause.

Now, having said that, you must note that federal lobbying rules have changed in the past few years. Expenditures used to be counted mainly as the time and money you spent for actual meetings to directly lobby. Under the new lobbying rules, everything gets counted including, but not limited to: the time and money you spent preparing to lobby; the time and money spent by staff preparing your lobbying efforts; overhead incurred by your organization (what percentage of operational and capital expenses could be counted against the lobbying activity?).

This is where the accountant comes in.

Additionally, there are ceilings for lobbying expenditures that require the organization be registered as a lobbying organization, see Lobby Disclosure Guidelines and there are reports that now must be filed once an organization has hit that ceiling.

However, while at first blush it might seem daunting, once your organization is in the system, it is easy to file the necessary reports.

I encourage you to do what it is you need to do and that is educate and advocate for your cause. To a great extent, that is what many nonprofits are for, to provide a voice for their cause.

This article is not meant to be a substitute for getting legal or accounting advice from your lawyer or your accountant.  If you have any questions, you can always call the IRS, I have found them to be quite responsive and helpful.