Why is a 501(h) election important to nonprofits engaged in lobbying?

Many nonprofits are under the impression that lobbying is forbidden or severely restricted, but that is not entirely the case. The fact is that nonprofits need to be very careful about blindly engaging in lobbying activity, but they may freely engage in lobbying as long as that activity amounts to only an “insubstantial” amount of the nonprofit’s activities. Herein lies the problem: the IRS has not given us a definition of the term. Therefore, being able to predict whether your nonprofit’s lobbying activities will or won’t cross this imaginary line is all but impossible. So, what to do?

Surprisingly, for many nonprofits there is a simple election that will allow a nonprofit to avoid the uncertainty of having their lobbying activity measured by the IRS’s subjective test. Filing IRS Form 5768 (also known as “filing the 501(h) election”) allows nonprofits to elect to be measured by the objective “expenditure test” instead. The (h) election simply allows that nonprofit to opt out of the vague “substantial” activity test and use the more concrete and predictable expenditure test. This single action can dramatically improve the flexibility of a nonprofit to safely engage in limited lobbying activities without risking the loss of their 501(c)(3) status.

As the IRS website points out: “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

 

Although the (h) election provides nonprofits with a great deal more safety and security in planning  their lobbying activities, hard dollar limitations still apply and a nonprofit that engages in excessive lobbying activity over a four-year period can still  lose its tax-exempt status, making all of its income for that period subject to tax.  In fact, these hard dollar amounts for even one year will trigger an excise tax equal to 25  percent of the excess. Needless to say, budgets and detailed accounting records should be maintained to ensure compliance and the continued flexibility afforded by this election.