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Q&A: What are the advantages and disadvantages of selecting the IRS 501(h) lobbying election?

Generally, the IRS limits lobbying by a public charity to what is called an “insubstantial” amount of its overall activity. Because the meaning of that word is obviously open to interpretation (and disagreement), over the past 40 years, Congress has attempted to clarify what is or is not considered excessive lobbying.Section 501(h) of the Internal Revenue Code gives charities a black and white test for determining a safe harbor limit on their lobbying activities. An organization files Form 5768 with the IRS indicating its intention to have its lobbying activities governed by section 501(h). This election stays in effect until the organization notifies the IRS otherwise. Then, the organization annually reports its lobbying expenditures on Schedule C of Form 990. Allowable lobbying expenses (the “lobbying nontaxable amount") are determined using 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 up to $17,000,000 $225,000 plus 5% of the exempt purpose expenditures over $1,500,000
Over $17,000,000 $1,000,000

The obvious advantage of taking the election is that as long as you don’t cross it, it is almost impossible to run afoul of the IRS for your lobbying activities. Most experts believe that if you are a smaller organization involved in lobbying activities, taking the election is a no-brainer.

There are some potential drawbacks, though. The IRS defines two types of lobbying: direct lobbying (essentially, contacting a legislator or government official to offer a point of view on a specific piece of legislation) and grassroots lobbying (communication with some or all of the general public offering a point of view on a specific piece of legislation and issuing a “call to action” on the part of the recipient). For reasons that are unclear, at least to me, grassroots lobbying expenditures are limited to 25 percent of the total lobbying nontaxable amount.

Also, once you have taken the election, the penalties for not living within it are straightforward: if you engage in excessive lobbying during a given year, you will have to pay an excise tax of 25 percent on the excess amount; if you engage in excessive lobbying on average over a four year period, you will probably lose your tax-exempt status and be required to pay taxes on all of your revenue during that four year period.

On balance, not taking the 501(h) election is basically a “do you feel lucky, punk?” kind of play. Unless you are a very large organization, the IRS is not likely to let you get away with much (if any) more than is allowed for under the election. As in all existential organizational matters, experienced legal advice should be sought whenever in doubt.

Chuck McLeanThe preceding post was written by Chuck McClean. Have questions about the nonprofit sector? Enter them in the comments section of this post and we will try to get to them as we can.

Topics: Policy