Nonprofits face restrictions on work they do, or expenses they incur, that are considered political activities or lobbying. Political activities are efforts to support or oppose a candidate running for office at the local, state, or federal level. These activities are prohibited for 501(c)(3) organizations, though they are allowed for organizations exempt other some other sections of IRC section 501(c).
Lobbying is an effort to influence legislation being considered by a government body, and is broken into 2 categories. Direct lobbying consists of interactions with legislators, government officials, and other employees of the legislative body or government that participate in forming legislation. Grassroots lobbying attempts to influence legislation by affecting the opinions of the general public, or a portion of it, e.g. by asking your constituents to contact legislators and urge them to vote a certain way. Typically, to be considered either direct or grassroots lobbying, the effort needs to refer to a specific piece of legislation being considered, and reflect a view on it. 501(c)(3)s can engage in a limited amount of lobbying, but if it becomes substantial, you will lose your tax exemption.
If your organization undertakes political activities or lobbying, you’ll need to file Schedule C to report the type of activities you engaged in, and the amount of money you spent on them. Part I asks introductory questions about your activities, and Part II gets more specific. The section of Part II you fill out will depend on whether you filed for an election under section 501(h).
The lobbying limitation is ambiguous, saying it can’t be a “substantial” part of what you do (measured by effort or money expended) but doesn’t define what’s considered substantial. If you so choose, you can file Form 5768 for an election under section 501(h), which gives a more bright-line test of whether your lobbying activities are substantial. You can also reverse this election by filing a revised copy of the same form.
If you don’t use the 501(h) election, you’ll fill out Part II-B, check off which types of lobbying activities you engaged in, list the related expenses, and describe the activities in more detail in Part IV. For expenses, include the allocable portion of overhead and administrative costs.
If you do use the 501(h) election, you’ll fill out Part II-A, where you’re asked to calculate what portion of your lobbying expenses, if any, is taxable. For this calculation, include the allocable portion of overhead and administrative costs. You’re allowed some nontaxable lobbying expenses, up to certain thresholds, which are based on your total expenses towards your exempt purpose. For direct lobbying, the nontaxable amounts are:
- If $500,000 or less: 20% of total exempt purpose expenses
- Over $500,000 but not over $1,000,000: $100,000 plus 15% of the excess over $500,000
- Over $1,000,000 but not over $1,500,000: $175,000 plus 10% of the excess over $1,000,000
- Over $1,500,000 but not over $17,000,000: $225,000 plus 5% of the excess over $1,500,000
- Over $17,000,000: $1,000,000
For grassroots lobbying, the nontaxable amounts are 25% of those for direct lobbying. If you exceed the nontaxable amounts for either type of lobbying, you’ll need to file Form 4720 to report and pay the relevant taxes. In Part II-A, you’ll also calculate your lobbying expenses and nontaxable amounts for the current and 3 prior years. If your cumulative expenses are more than 150% of your cumulative nontaxable amount, you’ll lose your tax-exempt status.
For organizations exempt under sections 501(c)(4), (5), and (6), the limitations on, and requirements for reporting, political and lobbying activities are different from those exempt under section 501(c)(3). For these organizations, see more information at the end of this article by accounting firm Selden Fox.