At any given time, elected officials across the country are meeting to make complex decisions that affect every member of their constituency. Often, these officials are tasked with drafting and enacting laws involving niche subjects where they may lack expertise. Fortunately, it is the right of the people to participate in this process by offering specialized knowledge when the need arises.

It is often overlooked that certain organizations exempt under 501(c)(3) of the Internal Revenue Code are also allowed to participate in the legislative process. While strict rules have been enacted to prevent these organizations from taking an active role in political campaigns, the law states that they may engage in legislative lobbying so long as it is an “insubstantial” portion of their activities.

The vagueness of the word “insubstantial” is often concerning to these organizations. Rather than risk their tax-exempt status, many will abstain from lobbying and miss a great opportunity to shape enacted policy. Organizations in this situation should consider filing a 501(h) election to measure lobbying activity through a bright-line expenditure test rather than subjectively demonstrating any lobbying activity is insubstantial.

By making this one-time election, an organization may engage in direct and grassroots lobbying provided that the associated expenditures do not exceed calculated ceilings over a four-year period. Direct lobbying occurs when the foundation acts on its own behalf to influence a legislative body. Alternatively, when a foundation is asking members of the public to speak out on the foundation’s behalf (such as a request to contact your congressman), the foundation is engaging in grassroots lobbying.

Form 990 is used to establish these dollar-based limits by applying graduated rates defined by the Internal Revenue Service to total exempt-function expenditures. Since the calculations are based on a sliding scale, the lobbying ceilings will grow along with the filing organization. Of course, the filing organization should be aware of its lobbying activities to ensure they do not exceed the stated limitations. Any lobbying expense that exceeds the defined ceiling in a single year is vulnerable to a 25% excise tax. Additionally, an organization that exceeds the defined limits over a four-year period risks the retroactive termination of their tax-exempt status.

The relative ease of filing this election makes it one of the most effective insurance policies for a qualifying organization that expects to incur lobbying expenses in the future. This election can be made at any time during the tax year and is effective until the organization decides to revoke it. Unfortunately, the 501(h) election is not for everyone. Large organizations with exempt-function expenditures of $17,000,000 or more will find their ceiling no longer increases as their expenses grow. Additionally, private foundations and churches exempt under 501(c)(3) are specifically prohibited from making this election. If you feel this election may be beneficial for your organization and would like to discuss a specific course of action, please contact us so we may review any details.

Jason Jackson
Jason Jackson | Tax Administrator