With the 2020 presidential election coming — in the middle of a pandemic, no less — many nonprofits are naturally quite eager to get involved. After all, whoever assumes office at the federal, state, and local levels will enact laws and regulations directly impacting the mission of many nonprofits. So, can nonprofits be political? It is a good question, and one we hear at BPM.
Our answer? Nonprofit leaders who want to get involved in politics must proceed with caution. While the Internal Revenue Code (IRC) does allow nonprofits a reasonable amount of freedom to engage in a certain amount of activities the average person might consider “political,” such as lobbying for policy changes or encouraging voter participation, there are strict limitations on what 501(c)(3) public charities can do politically while maintaining their tax-exempt status. (There are, of course, other types of nonprofit organizations, such as 501(c)(3) private foundations, 501(c)(4) social welfare organizations, 501(c)(6) trade associations and more, but to avoid complicating an already complex area of law, this article will restrict itself to rules governing 501(c)(3) public charities.)
Moreover, these rules can seem rather counterintuitive. So to get a clearer picture of what nonprofits can and cannot do while remaining tax-exempt, here is a high-level summary of what activities nonprofits may safely engage in this election season without jeopardizing their tax-exempt status.
“Advocacy,” “lobbying” and “political activities”
To many readers, these terms might seem basically synonymous. However, they have clear and distinct meanings in the context of nonprofit organizations getting involved in politics and under the Internal Revenue Code.
“Advocacy” refers to a nonprofit arguing on behalf of its mission in the public sphere. Talking to a reporter about your organization’s mission, for example, could be considered advocacy. So would educating legislators about a topic related to your charity’s cause, or organizing a rally to draw attention to a key issue. Advocacy is thus a good chunk of what most nonprofit organizations do in their regular day-to-day activities. And it is therefore no surprise that the tax rules governing 501(c)(3) organizations place no limits on advocacy generally, unless the activities fall within the narrower definitions of lobbying or political activity.
Other permissible types of advocacy for public charities include encouraging non-partisan voter participation or taking a stand against legislation that may harm the organization.
“Lobbying” involves attempting to influence legislation, either directly, by communicating directly with a legislator, or indirectly, by communicating with voters. That latter kind of lobbying is what is typically referred to as “grassroots” lobbying. The Internal Revenue Code (“IRC”) places limits on both of these types of lobbying—they must be an insubstantial part of the organizations activities and expenditures–but does not outright prohibit them.
“Political activities,” on the other hand—namely, those that concern electing an individual to public office, are prohibited for 501(c)(3) public charities, and nonprofits should proceed with caution in this arena. Public charities can participate in certain “non-partisan” political activities, such as holding voter education programs, candidate debates, voter-registration drives, or running programs that increase civic engagement, but they must be done in a manner that is clearly mission-aligned and showing no preference to any candidate. Other sorts of political activities are disallowed completely for public charities, especially those that are “partisan” in nature. While the term might mean something more broadly in day-to-day speech, in the IRC it has a more narrow meaning, and refers specifically to intervening in electoral activities by endorsing or opposing a candidate for office.
Nonprofit leaders must be especially careful here. While they certainly do not give up their right to engage in political activity in their private lives, they cannot endorse or oppose a candidate while acting as representatives of their respective nonprofit organizations, or else it could be construed as the organization engaging in prohibited political campaign activity. Nonprofit leaders should proceed with caution before attending or speaking at events that could be viewed as political campaigning or an endorsement on behalf of the organization. Leaders should ensure they are not using organizational resources and not acting in an official capacity for their organization when participating activities as an individual citizen. The same caution should be used when a public charity invites candidates, officials or guests to speak at their organization’s events during election season—if they are invited in a non-candidate capacity, candidates should not use the event as an opportunity to campaign for votes or financial support, and the nonprofit should not make reference to the election or evince any bias in support of the invited candidate. If individuals are invited by nonprofits to speak in their candidate capacity, the nonprofit should ensure that all legally qualified candidates from all parties are offered an equal opportunity to speak.
The Internal Revenue Service (“IRS”) will look to the “facts and circumstances” of all of the relevant factors of specific activities to determine if a public charity has engaged in political campaigning. The consequences for engaging in excessive lobbying or political campaign activities begins with tax penalties, and after repeated violations, it can result in automatic revocation of tax-exempt status. That is why it is so vital for nonprofit leaders and their staff to understand the distinction between these activities.
Limitations on lobbying
Exactly how much lobbying is allowed for 501(c)(3) organizations? According to the IRC, organizations can engage in lobbying so long as it does not constitute “a substantial part of the activities.” But what exactly is “substantial?”
The IRC actually has two different options for determining your compliance with lobbying limits. The first is the “No Substantial Part” test, which is subjective (i.e., there is no bright line test for substantiality) and the determination is made on a case-by-case basis analyzing all facts and circumstances, including lobbying expenditures, staff and volunteer hours, and overall lobbying activities). This is the default test by which nonprofits engaged in lobbying will be judged. Under this test, it can be hard to predict if your activities will be determined as substantial and trigger penalties or worse.
To avoid this uncertainty, organizations may opt for the 501(h) election, which allows the organization’s lobbying activities to be measured on an objective, monetary basis. This objective test takes into account the percentage of an organization’s expenditures spent on lobbying. The exact limit of lobbying expenditures for a given organization depends on the size of the organization and how much the organization spends overall, but caps out at $1 million.
The benefit of making the 501(h) election, obviously, is the clarity it provides. This clarity can help you track your organization’s lobbying activities or even plan them in advance. However, it may be preferable for very large charitable organizations that wish to pursue lobbying activities, and for whom $1 million would represent a small percentage of its expenditures, to skip the 501(h) election and stick with the subjective test. As always, consult your CPA or attorney for recommendations and guidance.
Lobbying or not lobbying?
For those who are not familiar with the topic, the lines between advocacy, lobbying and political campaign activity can seem to run into one another. Many real life cases can raise many questions. How to categorize these cases will often require professional judgment and experience. But for now, here are some helpful real-world examples:
- Meeting with legislators to provide your organization’s view about specific legislation.
- Organizing an event that urges the public to contact their legislators about a piece of specific legislation.
- Coordinating volunteers to canvas their neighborhoods to support specific ballot measures.
- Writing a legislator and urging them to support a change to existing legislation.
- Educating legislators about a general topic or issue related to the organization’s mission without reference to specific legislation.
- Organizing a rally to promote your organization’s mission.
- Conducting non-partisan voter registration or “Get-Out-the-Vote” drives.
- Participating in or pursuing litigation to obtain a favorable judgement of the law.
BPM understands how important your organization’s tax-exempt status is to achieving its mission, and has the accounting and operational expertise nonprofits need to ensure they maintain it.
We understand that, especially in a presidential election year, many organizations are passionate about their mission and may want get involved in politics. Our professionals bring experience in a wide array of nonprofit sectors to help your organization achieve the advocacy goals that relate to your mission, while ensuring full compliance with rules governing nonprofits. More than just accountants, we act as advisors, helping you strategize your organization’s activities and balance its priorities so that you act in a way that is optimal from a tax and a financial perspective.
To learn more about how BPM can help your nonprofit get involved and address your questions, contact us today.
Join us for an engaging conversation about this topic during an upcoming webinar on September 24th. Register now.