Political and Legislative Activities
There is often confusion amongst those involved with 501(c)(3) organizations, as well as the general public, concerning the extent to which such organizations can participate in political and/or legislative activities. Questions frequently arise regarding whether a 501(c)(3) should make the IRC 501(h) election; whether it should create a related 501(c)(4) entity able to participate in these activities; and whether the activity in which it is currently engaging, or desires to engage, could pose a threat to its exempt status. If it has not happened already, these are all conversations your board should be having.
If your organization is engaging in any legislative or lobbying activity, or you are not sure whether or not it is, it is a good idea to consider making the 501(h) election. It is a one page form that requires only basic information about your organization and the signature of an authorized officer. Making this election may actually simplify things for your organization as the election forces the IRS to consider your lobbying activities using an objective standard as opposed to leaving this determination open to subjective consideration. Under this election, the IRS must use specific numeric limits that are dependent on your organization’s revenue and expenditures (as such, please note that proper accounting is imperative with a 501(h) election). Thus, the standard is clear – if your organization falls within such limits, it is within the safe harbor of the 501(h) election. On the other hand, if your organization does not make the 501(h) election, then the IRS determines the legality of its lobbying expenditures based on the “insubstantial part test.” This test sets a highly subjective standard which allows the IRS to determine your organization’s compliance by considering whether it has spent a “substantial part” of its activities on “propaganda or otherwise attempting to influence legislation.” “Substantial” is not defined and your charity risks losing its exempt status should it exceed this vague standard. If your organization is spending any money on lobbying, or is thinking about doing so, it is better to know exactly what is allowable than be judged by the IRS based on a subjective test. Further, the 501(h) election provides your organization with a bright-line test to consider when determining whether or not to form a related entity that has more flexibility concerning lobbying or legislative activity. That being said, should your organization want to participate in consistent lobbying activities, it may be worthwhile to create a related IRC 501(c)(4) organization to conduct such activities in order to protect the tax exempt status of your organization. “Social welfare organizations” described in IRC 501(c)(4) may engage in an unlimited amount of lobbying provided that such lobbying is related to the organization’s exempt purposes. (It is important to note here that it is necessary to be careful about the relationship between your 501(c)(3) and any related entity as commingling of funds and other resources can attract an IRS audit and other problems including, but not limited to, loss of exempt status. As such, please consult a legal professional about some important steps to take to avoid such pitfalls).
Once your organization makes the 501(h) election, can it engage in political activity too? This can be confusing as the IRS distinguishes between “lobbying activity” and “political activity.” Even with the 501(h) election, a 501(c)(3) organization can never participate or intervene in any political campaign on behalf of (or in opposition to) any candidate for public office. A “candidate” is defined by the IRS as any individual who is a contestant for an elective public office, whether that office is national, state or local. Specifically, your organization cannot (1) endorse any candidate, (2) make donations or contributions to a candidate’s campaign, (3) participate or engage in political fundraising events or otherwise solicit contributions for a candidate, or (4) become involved in any other activity that may otherwise favor or oppose a candidate for public office. Further, it cannot encourage members of the public to vote for or against a particular candidate even on the basis of nonpartisan criteria. However, your organization can encourage the public to vote generally, provide neutral nonbiased information on candidates, and even invite political candidates to speak at its events granted certain procedures are followed. If your organization is contemplating partaking in political activities, it would be prudent to consider setting up a related IRC 501(c)(4) organization to conduct such activities in order to protect your organization’s 501(c)(3) status. IRC 501(c)(4) organizations may engage in some political activities, such as political campaigns on behalf of or in opposition to candidates for public office, provided that they do not constitute the organization’s primary activity. As it can often be difficult to determine where the line is drawn between allowable activity and the kind that can cause your organization’s tax exempt status to be revoked, please consult with your legal professional for additional advice and guidance before engaging in any such activities.