Q&A #152 – What happens if a 501(c)(3) public charity exceeds the 501(h) lobbying limits?
Question: I am the Executive Director of a 501(c)(3) public charity that has filed the 501(h) election and plans on expanding its advocacy activities on policy issues that are important to the organization’s mission. Some Board members have raised concerns about losing our tax-exempt status if we exceed the limits for allowable lobbying. What happens if we exceed the 501(h) lobbying limits?
Answer: 501(c)(3) public charities are permitted to engage in “lobbying” up to certain limits. Organizations that make the “501(h) election” are subject to a more concrete set of limits based solely on expenditures made by the organization for lobbying purposes. If an organization exceeds these limits in any one tax year it will have to pay a 25% tax on the excess. A 501(h)-electing organization’s tax-exempt status will not be revoked unless its lobbying expenditures exceed 150% of the limits over a 4-year period.
The 501(h) election (made by filing Form 5678) is usually preferable for most 501(c)(3) public charities. In contrast to the more ambiguous “no substantial part” test that otherwise applies, the 501(h) limit only counts lobbying expenditures (including allocations of staff time and overhead), without reference to non-monetary factors such as volunteer time or the relative importance of the lobbying effort. Further, 501(h)-electing organizations are subject to more clear definitions and exceptions under section 4911 of the Internal Revenue Code.
While a detailed explanation of the lobbying rules and the calculation of the limits is beyond the scope of this Q&A, it is important to be aware that there is a distinction between “grassroots lobbying,” which includes certain communications aimed at influencing the general public on legislative matters, and “direct lobbying,” which includes certain communications with legislators and their staffers on legislative matters.
501(h)-electing organizations are subject to overall limits on lobbying expenditures, as well as separate, lower limits on grass roots lobbying expenditures equal to ¼ of the overall lobbying limit. The limits are applied on a sliding scale based on the organization’s total “exempt purpose expenditures” as defined in section 56.4911-4 of the Treasury Regulations, up to a total cap of $1,000,000 in overall lobbying expenditures and $250,000 in grassroots lobbying expenditures. Lobbying expenditures are reported on Form 990, Schedule C, and amounts within the limits are referred to as “nontaxable amounts.”
An organization that exceeds the overall lobbying limit or the grassroots lobbying limit for a particular tax year must pay a tax in the amount of 25% of the excess and file Form 4720. Organizations that exceed both the overall lobbying limit and the grassroots lobbying limit pay a tax only on the excess that is larger.
A 501(h)-electing organization’s 501(c)(3) status will not be revoked unless the organization’s lobbying expenditures exceed 150% of the overall lobbying limit or the grassroots lobbying limit over a 4-year averaging period. In other words, an organization whose lobbying expenditures are more than 150% of one of the limits in a single tax year is only subject to a tax, and its tax-exempt status will not be revoked if it is able to lower its lobbying expenditures in future years such that its lobbying expenditures do not cross the 150% line over the aggregate 4-year period.
Planning Tip – If your organization has exceeded or is close to exceeding the 501(h) lobbying expenditure limits in one tax year, there should be plenty of time in the 4-year averaging period to modify the organization’s activities and avoid revocation of tax-exempt status. Modifications to explore could include reducing lobbying expenditures as part of the multi-year budget planning process, utilizing one of the many exceptions available under section 56.4911-2 of the Treasury Regulations and/or spinning off lobbying activities into a separate 501(c)(4) organization.
501(c)(3) public charities should not be hesitant to engage in limited lobbying activities if these efforts are important to the mission. The 501(h) election can help organizations to be more confident and precise about where they stand with respect to the lobbying limits and have a clearer understanding of what happens when the limits are exceeded.
If you have a question you would like to submit to SE4N, send it to us using the contact form and we will consider answering it in a future post. Please do not send confidential information.
