Can a public charity engage in efforts to influence legislation? Yes, but not as a “substantial part” of its activities.
Under IRC 501(c)(3), an organization will not qualify (or remain qualified) as tax-exempt if it carries on propaganda, or otherwise attempts to influence legislation, as a “substantial part” of its activities. What constitutes a substantial part is unclear. Neither the Code nor the regulations elaborate on this phrase.
Fortunately, Congress enacted IRC § 501(h) to inject some certainty into this area. It provides a safe harbor from the substantial part rule.
An organization wanting to influence legislation may make a 501(h) election by filing Form 5768 with the IRS. Thereafter, it will not be treated as substantially engaging in lobbying so long as its expenditures to influence legislation do not “normally” exceed certain thresholds.
There are two such thresholds.
The first threshold is the “lobbying ceiling amount.” Lobbying, in this context, means any attempt to influence legislation by communicating with representatives of a legislative body. The lobbying ceiling amount is equal to 150% of the “lobbying nontaxable amount.” This is the amount, not to exceed $1.0 million, determined using the table set forth in IRC § 4911(c)(2). Under the table, a public charity’s lobbying nontaxable amount is a percentage of the total amounts paid or incurred by the charity to accomplish its charitable purposes (“exempt purpose expenditures”):
|EXEMPT PURPOSE EXPENDITURES (EPE)||LOBBYING NONTAXABLE AMOUNT|
|< $500,000||20% of EPE|
|$500,000 – $999,999||$100,000 + 15% of EPE over $500,000|
|$1,000,000 – $1,499,999||$175,000 + 10% of EPE over $1,000,000|
|> $1,500,000||$225,000 + 5% of EPE over $1,500,000|
IRC § 4911(c)(2) Table.
The second threshold is the “grass roots ceiling amount.” Grass roots activities are attempts to influence legislation through efforts to affect the opinions of the general public or any segment thereof. The grass roots ceiling amount is 150% of the “grass roots nontaxable amount.” This is simply 25% of the lobbying nontaxable amount.
In summary, a public charity is at risk of losing its tax-exempt status if it consistently has:
- Lobbying Expenditures > [1.5 * Lobbying Nontaxable Amount], or
- Grass Roots Expenditures > [1.5 * (Lobbying Nontaxable Amount * 0.25)]
For example, assume Public Charity made exempt purpose expenditures of $1.5 million in 2017. Based on the table above, its lobbying nontaxable amount would be $225,000. Its grassroots nontaxable amount would be 25% of this amount, or $56,250. Therefore, if a 501(h) election had been in place in 2017, Public Charity could have spent $337,500 on lobbying and $84,375 on grass roots activities without running afoul of the substantial part test.
Legislative expenditures that fall short of these thresholds may keep a public charity from losing its tax-exemption, but that does not mean that such efforts are without tax consequences. IRC § 4911 imposes an excise tax on a charity’s excess lobbying expenditures. A charity will be liable for a 25% tax to the extent that its lobbying expenditures exceed the lobbying nontaxable amount or its grass roots expenditures exceed the grass roots nontaxable amount.
- Section 4911 Tax = .25 * (lobbying expenditures – lobbying nontaxable amount)
- Section 4911 Tax = .25 * (grass roots expenditures – grass roots nontaxable amount)
Staying with our previous example, in 2017 Public Charity could have expended $337,500 on lobbying and/or $84,375 on grass roots activities without jeopardizing its tax-exempt status. Yet it would have been liable for excise tax in the amount of $28,125 [337,500 – 225,000] on its lobbying and $7,031.25 [84,375 – 56,250] on its grass roots activities.
Accordingly, to stay within the bounds of IRC § 501(h) and avoid the excise tax under IRC § 4911, a charity must keep its expenditures to influence legislation at or below the lobbying nontaxable amount and the grass roots nontaxable amount.
Posted by Joel D. Roettger, JD, LLM, EPLS