Protect Your Tax-Exempt License: Learn the Rules of the IRS Road

A trillion-dollar infrastructure bill may improve our nation’s highways, but saving lives is not as easily bought.  Safety mostly depends on all drivers knowing and obeying the rules.  Our nation’s well-developed tax-exempt infrastructure is similar. It greatly facilitates the charitable movement of goods and services but is equally dependent on all users knowing and following the IRS rules of the road.

Take one section of the charitable highway – activity in the public square of laws and legislators.  It has two distinct lanes with very different rules.  According to the IRS road map “Political activities and legislative activities (commonly referred to as lobbying) are two different things and are subject to two different sets of rules and have different consequences of exceeding the limitations.”  Violating the rules prohibiting politicking are like a DUI where a single offense can result in lock-up and loss of license.  Lobbying on the other hand is like a school zone:  slow down, drive carefully and you can get through safely.

What practices trigger the prohibition on political activity for tax-exempt organizations?

• All section 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office.
• This absolute prohibition includes any contribution to political campaign funds.
• It also prohibits any public statement of position (verbal or written) made on behalf of the organization in favor of or in opposition to any candidate for public office.

What’s the penalty for engaging in any such prohibited politicking?

Violating this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise taxes.

What exactly are the key elements of such prohibited politicking?

Prohibited politicking consists of four elements: (1) a charitable organization may not “participate” or “intervene,” (2) in a “political campaign,” (3) which campaign must be with respect to an individual who is a “candidate,” and (4) the candidate must be running for a “public office.”

Are there any permissible political activities?

Yes, very narrow. Some political activities if they are strictly nonpartisan and/or educational activities, may be permissible despite indirectly involving political campaigns. For example, certain voter education activities such as conducting public forums or debates between candidates for public office, carefully and unbiasedly run, may be treated as nonpartisan voter education.

Are there different rules on political activity for churches and religious groups?

No, the same prohibition of political activity applies. That said, churches and charitable organizations are not prohibited from engaging in issue advocacy. However, such advocacy cannot be used to endorse or oppose a current candidate for political office. The line between issue and candidate advocacy is highly fact specific and can be blurry, so informed counsel should be sought in this area.

Do the IRS no-politicking rules apply only to the organization, or also to its leaders?

It only applies to the organization but be careful. Strictly speaking, the IRS rules apply to entities that has received tax-exempt status, and not to private individuals. So, the leaders, members, or employees of 501(c)(3) organizations aren’t prohibited by these IRS anti-politicking rules from any sort of political action in their individual capacity. However, care must be taken to segregate personal activity from representation of the entity.  No use of charity letterhead, website, staff, trademarks, goodwill, or resources of any kind is permitted for personal political activity.

What is the penalty for violating the prohibition?

Penalties for politicking include revocation of exempt status, imposition of excise taxes, or both.

What is nonprofit lobbying?

“Attempting to influence legislation” (or “lobbying”) is generally understood to mean action influencing Congress, any state legislature, any local council or similar governing body, or the public at large with respect to a legislative proposal, referendum, initiative, constitutional amendment, or similar procedure. That is, supporting (or opposing) a particular bill or legislative proposal. This is in contrast with political activity, which is the support (or opposition) of a political candidate.

Is lobbying prohibited for 501(c)(3) tax-exempt organizations?

Tax-exempt organizations may engage in lobbying without incurring tax penalties or losing their exempt status so long as the lobbying is not “substantial.”

What exceeds the speed limit of “substantial” lobbying?

• The definition of “substantial” lobbying is not as clear as a speed limit sign. The IRS offers two methods to determine if lobbying is less than substantial.
• The substantial part test has many unclear precedents in case law, but generally a 5% limitation is an accepted rule of thumb. That is, organizations are safe if their lobbying activities do not exceed 5% of their total activities.
• The §501(h) expenditure test permits expenditures for lobbying activities up to certain ceiling amounts. The tax code specifies these guardrail amounts:
  • 20% of the first $500,000 of the organization’s exempt purpose expenditures in any given year, plus …
  • 15% of the second $500,000, plus
  • 10% of the third $500,000, plus
  • 5% of any additional exempt purpose expenditures, with an annual cap of $1,000,000 of lobbying expenditures.

Do organizations have to report their lobbying activities to the IRS?

Yes, lobbying activities are reported on Schedule C of the IRS Form 990. Organizations that do not elect §501(h) status complete Section II-B of Schedule C; organizations making the §501(h) election complete Section II-A.

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