All nonprofits are permitted to do limited lobbying. The IRS uses two standards to measure a nonprofit's lobbying activities:
IRS Substantial Part Test vs. Expenditure Test
Substantial Part Test
Until 1976, nonprofits were only allowed to spend an "insubstantial" amount of total expenditures on lobbying, or risk losing their tax exemption. Unfortunately, lobbying laws did not define "substantial", nor outline clear spending limits. As such, the substantial part test, vague and lacking defined spending limits, often poses greater risk to nonprofits.
The 1976 Lobby Law provides generous and clear spending limits (up to $1 million annually as determined by budget size). Nonprofits that exceed limits face tax penalties rather than loss of tax-exempt status. With clear definitions, record-keeping and reporting are less burdensome. The 1976 law also protects officers and directors from penalties.
To take advantage of the opportunities offered by the 1976 law, nonprofits must take the 501(h) election by filing Form 5768, Election/Revocation of Election by an Eligible IRC Section 501(c)(3) Organization to Make Expenditures to Influence Legislation. The election may be taken at any time during the tax year for which it is to be effective. Download Form 5768.
Read more about the expenditure test at www.IRS.gov.
Selecting The Better Option For Your Organization
While the 501(h) election offers nonprofits numerous benefits, it may not be the best option for every organization. For example, churches and private foundations are not allowed to file the 501(h) election.
Large organizations with large direct lobbying budgets may be ineligible to file, or may find the substantial part test more advantageous.
The 501(h) election is typically best for small- and mid-sized organizations.
Nonprofits should seek professional legal counsel to determine the best solutions for their specific circumstances.
Read more about the 501(h) Election.