While the process of taking the 501(h) election to allow your nonprofit to lobby might seem confusing, it is actually quite simple.
Why Your Nonprofit Should Lobby Lawmakers [Part 1]
Despite a widespread misconception, both state and federal law permits almost all organizations to participate in nonprofit lobbying.
Nonprofits play an important role in our society. These organizations address the needs of vulnerable communities and build awareness around issues that are often neglected. Given the nature of their work, it is crucial that nonprofits work to inform the public policy debate and advocate on behalf of the communities they serve.
The Myth Surrounding Nonprofit Lobbying
Unfortunately, there is a great deal of confusion surrounding lobbying in the nonprofit sector. Vague IRS regulations and a fear of losing tax-exempt status, prevents many nonprofits from pursuing legislative advocacy. As a result, these organizations miss out on one of their best opportunities to inform opinion and affect change.
Despite a widespread misconception among nonprofit leaders, both state and federal law permits almost all nonprofits to participate in the public policy process. Even 501c3s, or charitable organizations, can take part in a wide range of lobbying activities as long as the proper procedures are followed.
Why Should Nonprofits Lobby?
Even with their extensive resources and staff, lawmakers are not always aware of important issues that affect their constituencies. As a result, legislators rely on advocates to communicate important information and illuminate problems in current policy. Lobbying and other forms of legislative advocacy give organizations the opportunity to educate lawmakers on important issues; thus ensuring legislators make responsible, well-informed decisions.
Additionally, nonprofit leaders are often the best equipped to educate lawmakers on the challenges facing vulnerable causes and communities. These individuals are devoted to advancing their organization's mission through research, fundraising and service. Their expertise is a valuable resource in educating lawmakers and informing the public policy debate.
What is Lobbying?
For most Americans, the practice of lobbying conjures images of corrupt, political insiders bribing lawmakers in exchange for political influence. This pessimistic view is accompanied by a general misunderstanding of the practice by the American public.
While many Americans believe lobbying is only practiced by Fortune 500 companies or America’s most wealthy political groups; the truth is that lobbying is a major function of almost every interest group in the United States and is practiced by charitable and for-profit organizations alike.
Although the term often takes on a negative connotation, lobbying is simply defined as the practice of attempting to influence public policy. While many assume lobbying consists of hiring a paid lobbyist to represent an organization, the practice can take on many forms. For example, grassroots advocacy is one form of lobbying that focuses on shaping public opinion and encouraging the public to speak out on relevant legislation.
Who Can Lobby?
Despite confusion among the nonprofit sector, almost all nonprofits are permitted to lobby. Even charitable organizations (501c3s), the most restricted type of nonprofit may legally lobby lawmakers. Other nonprofits such as trade associations, chambers of commerce and civic leagues are generally permitted to lobby freely and with less restrictions than charitable organizations.
501c3 Classification by the IRS
Charitable organizations and foundations are classified as a 501c3 organization by the IRS. Of all nonprofit classifications, 501c3s receive the most preferential tax treatment under the law.
Unlike other nonprofits, all contributions made to these organizations are tax deductible. As a result, charities receive more financial contributions than other types of nonprofits and are funded primarily by these donations.
501c3 Political Regulations
While 501c3s receive preferential tax treatment under the law, they must adhere to stricter limits in their political activities. Public charities are strictly prohibited from participating in certain activities such as contributing to a political campaign or supporting a political party. However, lobbying and other forms of legislative advocacy are permitted as long as organizations adhere to their financial limitations.
Public Charity Lobbying Limits
Charitable organizations have two options when determining how they will measure their lobbying limits: the insubstantial part test and the 501(h) expenditure test.
The insubstantial part test is the default system used by the IRS to measure a charitable organization's lobbying activities. The test permits lobbying as long as it is an “insubstantial” part of an organization’s overall activities. Much of the confusion surrounding nonprofit lobbying is a result of the vagueness of the insubstantial part test. This section of the tax code does not define what constitutes a "lobbying activity" nor does it define what percentage of lobbying activities qualify as "insubstantial."
As a result of the vagueness and confusion surrounding the insubstantial part test, Congress passed a law in 1976 that greatly expands nonprofits’ lobbying abilities and clearly lays out the limitations placed on lobbying expenditures.
The 501(h) expenditure test is much clearer and more lenient than the insubstantial part test, allowing for up to 20% of annual expenditures to go towards lobbying. The one caveat of this test is that nonprofits must elect to be covered by these rules and regulations. This process is known as “taking the 501(h) election.”