Policymakers need public input to develop ideas into good policy, and nonprofits are often valued experts in our areas of specialty. Lobbying is one way that we can remain directly at the table for conversations that impact our mission—nonprofits can and should lobby, but there are rules and regulations that govern lobbying activities for nonprofits.
What activities count as lobbying?
Lobbying is defined by federal tax law as any attempt to influence specific legislation (a bill that has been introduced or a proposal that may be introduced in US Congress).
On the other hand, advocacy involves identifying, embracing, and promoting a cause, and usually involves educating legislators on a broad issue or the operations of your nonprofit. There’s no limit to the amount of advocacy nonprofits can do!
Additionally, federal law identifies five activity categories that are excluded from the definition of lobbying:
Self-defense. Communication on any legislation that would affect an organization's existence, powers and duties, tax-exempt status, or deductibility of contributions is not lobbying (note: lobbying on budget appropriations does not fall under self-defense as defined here).
Technical advice. Providing technical advice to a governmental body in response to a written request is not lobbying.
Non-partisan analysis or research. According to the IRS, studying community problems and their potential solutions is considered non-partisan if it is "an independent and objective exposition of a particular subject matter...(which) may advocate a particular position or viewpoint so long as there is a sufficiently full and fair exposition of pertinent facts to enable the public or an individual to form an independent opinion or conclusion."
Examinations and discussions of broad social, economic and similar problems. Communication with the organization's own members with respect to legislation which is of direct interest to them, so long as the discussion does not address the merits of a specific legislative proposal and make no call for action is not lobbying.
Regulatory and administrative issues. Communication with government officials or employees on non-legislative (i.e. administrative) matters such as rulemaking is not lobbying. Note: Unlike federal law, Minnesota law does require state reporting on attempts to influence administrative action. For more information, see Minnesota Campaign Finance Board’s Lobbyist Handbook.
Reporting your federal lobbying activities with the IRS
All 501(c)(3) organizations (except churches, association of churches and integrated auxiliaries) must report lobbying expenditures to the IRS annually through Schedule C on Form 990.
The 501(h) election is a very simple one-page form (IRS Form 5768) that can be filed with the IRS at any time. Using the 501(h) expenditure test provides your nonprofit with clear rules on lobbying limits. Nonprofits report how much money is spent on direct lobbying and on grassroots lobbying.
If your nonprofit does not take the 501(h) election, the IRS will evaluate lobbying under the general principle that "no substantial part" of your activities can be devoted to lobbying. This regulatory framework does not provide specific guidelines, such as expenditure limits, and requires detailed reporting of a wide range of activities related to lobbying.
Best practice: Taking the 501(h) election
The 501(h) election establishes clear guidelines for lobbying expenditures by defining what percentage of an organization’s budget may be spent on lobbying without threatening their tax-exempt status.
The 501(h) election is a very simple one-page IRS Form 5768 that can be filed with the IRS at any time. It does not need to be re-filed annually; the (h) election remains in place unless you choose to terminate your election.
A 501(h) electing charity cannot lose its exemption for a single year’s excessive expenditures, while a non-electing charity can.
There is no personal penalty for individual managers of a 501(h) electing charity which exceeds its lobbying expenditure limits.
The organization only counts lobbying activity that costs money. Free activities, such as volunteer time, do not count against the organization’s lobbying limits because an organization does not pay its volunteers, including the organization’s board members.
501(h) provides a clear dollar limit on the amount of money an electing 501(c)(3) can spend on direct lobbying (directly stating your position on specific legislation to policymakers). The limits vary depending on the size of the organization’s budget. Small organizations that spend less than $500,000 a year can generally expend as much as 20 percent of their budget on lobbying.
The total lobbying expenditure limits under the 501(h) election are:
20 percent of the first $500,000 of exempt purpose expenditures, plus
15 percent of the next $500,000 of exempt purpose expenditures, plus
10 percent of the next $500,000 of exempt purpose expenditures, plus
Five percent of the remaining exempt purpose expenditures up to a total cap of $1 million.
Exempt purpose expenditures are all payments you make in a year except investment management, unrelated businesses and certain fundraising costs.
An electing 501(c)(3) may spend up to a quarter of its overall lobbying limit on “grassroots” lobbying (urging the general public to communicate the organization’s position on legislation to policymakers) or up to the entire amount on direct lobbying.
Note: The distinction between direct and grassroots lobbying is important under the 501(h) election because the 1976 Lobby Law specifies different expenditure limits for grassroots and direct lobbying activity. An organization may spend only one-fourth as much on grassroots lobbying, as on direct lobbying. For example, if an organization's annual permissible lobbying expenditures were $100,000, it could spend only $25,000 on grassroots lobbying. But it could spend the remaining $75,000 on direct lobbying.
Alliance for Justice’s Keeping Track: A Guide to Recordkeeping for Advocacy Charities helps 501(c)(3) organizations comply with federal tax law by tracking their lobbying activities (sample forms, describes multiple options for tracking staff time, overhead expenses, and direct costs).