Advocacy in Action: A Practical Guide to Lobbying for 501(c)(3) Organizations

Creating meaningful change often requires more than providing services. It also means speaking up for the policies that impact the people you serve. Fortunately, 501(c)(3) public charities can engage in a wide range of advocacy activities, including supporting or opposing legislation and ballot measures, communicating with lawmakers, and mobilizing others to do the same. However, it is important to understand what “lobbying” is and the related limits and reporting requirements. Organizations planning lobbying activities should work with legal counsel to evaluate their specific circumstances.

Author: Barkha D. Patel, Esq., Pro Bono Partnership of Ohio

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What is Lobbying?

According to the Internal Revenue Service, an organization is engaged in lobbying when it is attempting to influence legislation¹. This includes contacting, or urging the public to contact, members of a legislative body for the purpose of proposing, supporting, or opposing legislation, or advocating for the adoption or rejection of legislation.

What is not Lobbying?

Lobbying does not include efforts to support or oppose administrative actions (e.g., enacting agency regulations), as opposed to legislative actions. It also does not include nonprofit activity aimed at influencing public opinion and policy, educating the public or policymakers about issues related to the nonprofit’s mission, or nonpartisan voter engagement.

What are the Limits on Lobbying and Which Standard Should We Choose?

While a 501(c)(3) organization can engage in lobbying, the amount is limited by the IRS.² Organizations can choose from two standards to measure the amount of their lobbying activities:

(1) The default “Insubstantial Part Test”, which allows an organization to lobby as long as it does not expend a substantial amount of its resources on such activities; or
(2) The “Expenditure Test” under the Section 501(h) election, which measures and limits the amount of lobbying based on expenditures.

Without proactively making the Section 501(h) election, the default standard is applied, in which the IRS looks to all of the facts and circumstances, including time devoted to lobbying by both paid and volunteer workers, and expenditures by the organization. “Substantial” is not defined by the IRS, making the use of the default standard less predictable.

In contrast, more guidance exists for the Section 501(h) election (IRS Form 5768), by which the organization submits itself to a predictable test for substantiality—the Expenditure Test—to determine whether it exceeded the “substantial” level threshold. For direct lobbying, the Expenditure Test provides that as long as the exempt organization spends no more than 20% of its first $500,000 of annual exempt expenditures on lobbying ($100,000), it is under the threshold. If it exceeds the 20%, it will owe an excise tax on the difference, and if it exceeds 30%, and does that for a few years in a row, it could lose its exempt status. Also, the percentage of budget it can spend (the 20%) goes down for each additional $500,000 in expenditures. There is a more stringent threshold for grassroots lobbying (encouraging individuals to contact their legislators); that threshold is 25% of the 20%. For most organizations it is unlikely that this threshold will be exceeded.

Advantages to making the Section 501(h) election include:

The ability to plan ahead and budget accordingly under an objective standard;
Higher lobbying limits for most organizations;
Volunteer time is exempt—the calculation does not take into consideration activities for which there were no expenditures;
Lower risk of losing tax-exempt status—expenditures are measured by a moving average over a four-year period, and an organization must exceed limits by 50% to lose tax-exempt status;
No personal penalty taxes; and
It is simple to file.

However, if your organization has a very large lobbying budget, or engages in a high level of grassroots lobbying, it may be disadvantageous to make the election.

What are the Recordkeeping and Reporting Requirements?

Whether an organization uses the “Insubstantial” or “Expenditure” method of measuring the amount of its lobbying, there are recordkeeping and reporting requirements associated with both. If the Section 501(h) election is made, records of lobbying expenditures must include:

Expenditures for grassroots lobbying;
Amounts paid for direct lobbying;
Portion of amounts paid or incurred as compensation for an employee’s services for direct lobbying;
Amounts paid for out-of-pocket expenditures incurred on behalf of the organization and for direct lobbying;
The allocable portion of administration, overhead, and other general expenses attributable to direct lobbying;
Expenditures for publications or communications with members to the extent the expenditures are treated as expenditures for direct lobbying;
Expenditures for direct lobbying of a controlled organization to the extent included by a controlling organization in its lobbying expenditures; and
Identical records listed above as they apply to grassroots expenditures.

These expenditures are reported in Part II-A of Schedule C in IRS Form 990.

If an organization chooses to remain under the default “Insubstantial” test, recordkeeping requirements are less clear. This is because this test examines an organization’s activities as opposed to its expenditures, which are typically more straightforward. Part II-B of Schedule C asks organizations under the default “Insubstantial” test to report on the following:

Whether or not the charity lobbied (by using volunteers, paid staff, advertisements, mailings to members, legislators, or the public, published statements, grants to others for lobbying, direct contact with legislators, public events, or other means) and any associated expenditures; and
A detailed description of all lobbying activities, regardless of whether expenses were incurred.

Are there Additional Registration and Disclosure Requirements?

In certain circumstances, both state and federal law require additional registrations and disclosures.

Ohio: If the organization compensates an individual to advocate its interests before Ohio’s legislative branch, executive branch, or retirement systems, the organization must register each engagement with the Office of the Legislative Inspector General (OLIG). The organization must also report details about the lobbying activity and expenditures three times per year. For more information, please see the Ohio Lobbying Handbook.

Federal: Nonprofits may also be required to register with Congress and report activities and expenses in accordance with the Lobbying Disclosure Act (LDA) if they meet certain thresholds. An organization must register if both: (1) The organization has an employee who is a “lobbyist,” and (2) The organization’s total federal lobbying expenses are expected to exceed $12,500 during a quarter (there is a different rule if the organization has made the 501(h) election). The LDA defines lobbyist as a paid employee that makes at least two lobbying contacts with federal legislative or executive branch officials, and spends at least 20% of their time during any three-month period on federal lobbying activities.

Need Legal Advice?

If you are a PBPO client and would like more information or need assistance regarding this issue, contact PBPO at info@pbpohio.org or (513) 977-0304.

Not a Client? Check out our client qualifications and submit a Request for Legal Assistance application online. Questions? Contact us at info@pbpohio.org.

¹ Legislation includes action by Congress, any state legislature, any local council, or similar governing body, with respect to acts, bills, resolutions, or similar items (such as legislative confirmation of appointive office), or by the public in referendum, ballot initiative, constitutional amendment, or similar procedure. It does not include actions by executive, judicial, or administrative bodies.

² Note that nonprofits that receive federal funds may not use those federal funds for lobbying activities.

Disclaimer

This article presents general guidelines for Ohio nonprofit organizations as of the date written and should not be construed as legal advice. Always consult an attorney to address your particular situation.