With all the recent proposed and passed legislation impacting the sector, it’s important to make your voice heard. Nonprofits play a vital role in shaping public policy, educating communities and advocating for change — but when it comes to lobbying, many organizations hesitate because they’re worried they might cross a line that could jeopardize their tax-exempt status. The good news? Nonprofits can lobby. The key is understanding the rules and choosing the right framework for your organization.
Key Takeaways:
- The IRS divides lobbying into two types: direct and grassroots.
- Nonprofits can lose their tax-exempt status if they engage in too much lobbying.
- Filing IRS Form 5768 can help by providing clear, dollar-based limits on lobbying expenditures.
The Difference Between Advocacy and Lobbying
Advocacy is a broad term that includes activities like public education, community engagement and raising awareness about issues. It’s generally unrestricted for 501(c)(3) organizations.
Lobbying, however, specifically refers to attempts to influence legislation. The IRS defines the two types of lobbying as follows:
- Direct lobbying: Communicating with legislators or their staff to express a view on specific legislation.
- Grassroots lobbying: Urging the public to contact legislators about specific legislation.
Can Nonprofits Lobby? Yes — Within Limits
All 501(c)(3) organizations can engage in some lobbying, but the extent depends on whether they’ve made the 501(h) election. Lobbying activity is disclosed annually on Schedule C of IRS Form 990.
Lobbying Without the 501(h) Election – The “Substantial Part” Test
If a nonprofit doesn’t file IRS Form 5768, its lobbying activity is measured using the “substantial part” test. This test is evaluated retroactively by the IRS based on all facts and circumstances, including time, expenditures and the importance of lobbying to the organization’s mission. The IRS hasn’t defined what “substantial” means, but courts have suggested it could be as little as 5% of total activities — and too much lobbying under this test could result in loss of tax-exempt status.
Lobbying With the 501(h) Election – The “Expenditure” Test
By filing Form 5768, a nonprofit can opt into the 501(h) election, which replaces the vague “substantial part” test with clear, dollar-based limits on lobbying expenditures. Generally speaking, nonprofits are allowed to spend up to 20% of their first $500,000 in exempt purpose expenditures on lobbying, with decreasing percentages applied to higher spending tiers, up to a maximum of $1,000,000.
The 501(h) election becomes effective for the tax year in which Form 5768 is filed and remains in effect for future years unless revoked. This election isn’t available to churches or private foundations.
Should I Take the 501(h) Election?
The 501(h) election can be a beneficial option for nonprofits, as it provides clear boundaries and may help reduce the risk of accidentally violating IRS rules.
Advocacy is a powerful tool for change. With the right knowledge and safeguards, your nonprofit can speak up for your mission — confidently and legally. Creative Planning has a dedicated team of nonprofit tax professionals who assist in preparing hundreds of IRS Form 990 filings each year. Our team is ready to discuss the best approach for your organization. Schedule a call to learn more.
