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Prior to 1976, the IRS’s only codified limitation on lobbying by charities was the substantial part test. The critique of the substantial part test has always been that it is too vague and does not provide a clear enough standard or bright line rule for organizations. In response to that critique, 501(h) was created.
Under §501(h), public charities may elect to be governed by certain limits established under §4911, rather than by the substantial part test. A public charity cannot elect under §501(h) if it is a (1) a church, convention or association of churches, or integrated auxiliaries; (2) an organization that is described in 509(a)(3) and is a supporting organization to an organization that is not a charity; or (3) an organization engaged in testing for public safety.
In order to understand the restrictions on lobbying by §501(h), there are four key definitions that must first be understood: direct lobbying, grassroots lobbying, legislation, and “call to action.” If electing under §501(h), lobbying expenditures must be categorized as either direct lobbying or grassroots lobbying. Direct lobbying is defined “any attempt to influence any legislation through communication with any member or employee of a legislative body, or with any government official or employee who may participate in the formulation of the legislation.” In order to qualify as direct lobbying, the communication must refer to specific legislation and also express a view on that same legislation. Grassroots lobbying is defined as “any attempt to influence any legislation through an attempt to affect the opinions of the general public or any segment thereof.” In order to qualify as grassroots lobbying, the communication must involve a reference to specific legislation, reflect a view on that legislation, and encourage the recipient to take action on the legislation (a “call to action”).
Legislation is defined as “action by the Congress, any state legislature, any local council, or similar legislative body, or by the public in a referendum, ballot initiative, constitutional amendment, or similar procedure.” Legislation is understood broadly to also include legislation in foreign governments. A “call to action” involves a communication that: has the principal purpose of encouraging the recipient to contact a government official or employee for the purpose of influencing legislation; gives the contact information of the government official or employee; provides a petition, post-card, or other medium through which to communicate with a government official or employee for the principal purpose of influencing that government official or employee respect to legislation; or specifically identifies one or more legislators that the individual should target regarding their vote on legislation.
Charities electing under §501(h) are subject to specific monetary limits on lobbying expenditures set out in §4911. Lobbying expenditures include money spent for the purpose of influencing legislation through direct and grassroots lobbying. The limitation on an organization’s lobbying expenditures is the” lobbying nontaxable amount.” The lobbying nontaxable amount for an organization is calculated based on a declining percentage of an organization’s exempt purpose expenditures for the taxable year as follows: 20% of the first $500,000 in exempt purpose expenditures for the year, plus 15% of the second $500,000, plus 10% of the third $500,000, plus 5% of any additional expenditures. The lobbying nontaxable amount is capped at $1,000,000. As a result of the declining percentage scale, smaller charities are allowed to spend a greater proportion of their dollars towards influencing legislation than larger charities.
No more than 25% of a charity’s lobbying nontaxable amount may be spent on grassroots lobbying. This amount is the grassroots nontaxable amount. Direct lobbying is not so limited and can be conducted to the organization’s maximum lobbying nontaxable amount without triggering an excise tax.
Organizations that exceed either the lobbying nontaxable amount or the grassroots lobbying nontaxable amount are subject to a 25% excise tax on the greater of either the excess lobbying expenditures or the excess grassroots lobbying expenditures. For example, consider an organization that has a lobbying nontaxable amount of $500,000 and which makes lobbying expenditures of $550,000. The organization’s grassroots lobbying expenditures for the same period were $200,000 out of the total of $550,000 spent. Thus, the organization exceeded its lobbying nontaxable amount by $50,000, and its grassroots nontaxable amount by $75,000. The organization is liable for a 25% excise tax on the greater amount, which is the $75,000 by which it exceeded the grassroots nontaxable amount. If an organization normally makes either lobbying or grassroots lobbying expenditures in excess of either the lobbying or grassroots ceiling amounts (in excess is understood to be equal to 150% of those amounts as defined in §4911), then the organization is subject to revocation of its exempt status. “Normally” in this context is understood as the average of expenditures over a four year period.
Certain activities are exempt from the definition of influencing legislation, and thus expenditures for these activities do not count against an organization’s lobbying nontaxable amounts. An organization is not considered to be lobbying when it engages in any of the following: making available the results of nonpartisan analysis, study, or research; providing technical advice or assistance to a governmental body as a result of a written request from that body; appearances before or communications with a legislative body with regard to an issue that may affect the organization’s exempt status (also known as “self-defense” communications); communications with the organization’s bona fide members, unless the communication involves direct encouragement for the members to contact their legislators or to encourage others to contact their legislators; communications with government officials or employees for purposes other than lobbying; and examinations or discussions of broad social, economic, and similar problems, even if they are or are likely to be the subject of legislation. A “bona fide member” is one that expresses a desire to be a member and pays at least nominal dues, contributes at least a minimal amount of time, or is in a class of members that are given “lifetime membership” under a reasonable standard. If an organization’s members do not meet these standards, an organization is still able to count them as members if it can demonstrate to the IRS good reason for not meeting these standards and that the organization is not simply trying to sidestep the grassroots lobbying limitation.
Section 501(h) does result in additional reporting requirements for organizations electing to fall under its standards. Organizations electing under that section are required to report on their annual information return the total amount of lobbying and grassroots lobbying expenditures, as well as the maximum amount that the organization could have expended on both without triggering an excise tax. These reporting requirements require separate detailed recordkeeping of both direct and grassroots lobbying in each of the following areas: all amounts directly paid or incurred for both types of lobbying, including earmarked payments to other organizations for lobbying, fees or expenses paid to individuals, and printing, mailing, and other direct costs of distributing materials for both types of lobbying; the portion of all amounts paid as compensation or deferred compensation to an employee for both direct and grassroots lobbying; reimbursements for out-of-pocket expenses incurred on behalf of the organization for both types of lobbying; the portion of overhead expenditures that should be allocated to both types of lobbying; expenses associated with communications with the members for direct lobbying and with communications with the general public that are treated as grassroots lobbying; and expenditures for direct and grassroots lobbying that are incurred by a controlled organization.
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Please note: An organization that is considering whether or not to elect 501(h) should consult with compentant counsel that will be able to address the issue within the unique circumstances of that organization.