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What is the best way for a tax-exempt organization to engage in lobbying?

May 6, 2015 By Jacob Kaplan

Tax-exempt organizations under § 501(c)(3) of the Internal Revenue Code face strict rules about regulating lobbying activities.  Breaking these rules can result in severe consequences such as loss of tax-exempt status and excise tax penalties.  For those § 501(c)(3) organizations that wish to expand their operations to encompass lobbying activities, two primary options exist.

  1. Create and Operate an Affiliated § 501(c)(4) organization

Unlike § 501(c)(3) organizations, § 501(c)(4) organizations may engage in unlimited lobbying activities with the caveat that the § 501(c)(4)’s primary purpose must be to promote social welfare, not to support or oppose a political candidate or party.  It is common for § 501(c)(3) organizations to create affiliated § 501(c)(4) organizations to lobby for causes important to the § 501(c)(3).  Creating a § 501(c)(4) is similar to creating many other nonprofit legal entities.  The new corporate entity must file articles of incorporation with the secretary of state, appoint a board of directors, and draft bylaws and an IRS compliant conflict of interest policy.

Operating an affiliated § 501(c)(4) is more difficult than forming one.  Most importantly, the activities of the § 501(c)(4) may not be imputed to the § 501(c)(3).  This principle creates many operational complications.  To name a few, the § 501(c)(4) must (1) have its own board of directors, (2) file its own tax returns, (3) reimburse the § 501(c)(3) for its share of any common expenses, and (4) be functionally distinguishable from the § 501(c)(3) to the general public.  Violation of these or other similar rules can lead to loss of tax exempt charitable status and imposition of excise taxes on the § 501(c)(3) entity.

  1. Elect § 501(h) Treatment

Alternatively, § 501(c)(3) entities may elect § 501(h) treatment on IRS Form 5768.  Making this election permits § 501(c)(3) entities to engage in limited lobbying activities.  Limits are defined by a mechanical formula in § 501(h) that caps actual expenditures for “exempt purposes” and “lobbying expenditures.”  Separate caps exist for total lobbying expenditures and grassroots lobbying expenditures.  The quantitative limits provided in § 501(h) provide certainty to the § 501(c)(3) about how much lobbying is permissible.

Organizations that spend $500,000 or less per year on “exempt purposes” may spend up to 20% of the amount spent for “exempt purposes” on “lobbying expenditures.”  Of this 20% figure, no more than 25% may be used for “grassroots expenditures.”  For example, if an organization spends $400,000 per year for “exempt purposes,” it can spend up to $80,000 per year on “lobbying expenses.”  Of that $80,000, only $20,000 may be spent on grassroots lobbying.  Different, tiered caps exist for organizations that spend more than $500,000 for “exempt purposes” in a given year.

This option is simpler on both the front end and in continuing operations than the § 501(c)(4) option.  But, it may not be the right fit for organizations that wish to spend more on lobbying than § 501(h) allows.

Filed Under: Exempt Organization

About Jacob Kaplan

Jake Kaplan is an associate in the firm’s Wealth Planning and Exempt Organizations Group. He focuses his practice in the areas of federal taxation, exempt organizations and estate planning.

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