I’ve been watching the Olympics over the past few weeks, and it’s been breathtaking–literally. With each impossible snowboard flip, each triple Lutz, I hold my breath in anticipation. Will he do the double McTwist? Did she catch enough air? Will he stick the landing?
If you’re the leader of a nonprofit organization and want to lobby, you also have to strike the right balance between risk and recklessness. You need to go big enough to get noticed, but too big will land you in trouble.
Why Compete in the First Place?
Lobbying has a bad rep, but it’s actually at the heart of the First Amendment, which protects the right of the people—including nonprofits—to petition the government to take action on matters of concern. We may vilify “special interests,” but most of us are affiliated with groups or support causes that will need advocacy at some point in time. Lobbying is an effective way to accomplish this objective. In addition, the issues we care about are often far too complex to expect our public officials to understand in any depth, and a knowledgeable lobbyist can help educate them.
An Uphill Challenge for “501(c)(3)” Organizations
Lobbying poses a particular challenge for nonprofit “501(c)(3)” organizations. These organizations typically work to address social ills, support under-served populations, and provide important services. With huge competition for finite resources, 501(c)(3)s may need to influence legislation. Legislators get requests from all sides, and they are unlikely to take action where it may be most needed without considerable pressure. 501(c)(3)’s are free to provide nonpartisan analyses of issues involved in legislation and to educate government officials and the public without being considered as lobbying. However, 501(c)(3)s may not engage in unlimited advocacy aimed at influencing legislation in a particular direction, which is considered lobbying. The IRS strictly limits the type and amount of permitted lobbying. If you are a 501(c)(3) that exceeds the limits, you may be in for a nasty fall.
Trying to Keep Your Balance
If you’re a 501(c)(3) (other than a private foundation, not discussed here), the IRS requires that “no substantial part” of your overall activities be directed at influencing legislation. You may engage in some lobbying, but not too much or you’ll jeopardize your tax-exempt status. It’s a balancing act.
How do you determine whether your lobbying activities are not a “substantial part” of your activities? The IRS supposedly looks at “all the facts and circumstances” you report on your annual return, but exactly what facts and circumstances are being measured and how is left vague. The IRS might compare the amount you spend on your overall activities during the year versus the amount you spend on lobbying. Or it might be the number of hours. Or it might be a question of whether your primary objectives as an organization depend on the enactment or defeat of legislation. Or it might be some other metric.
Unfortunately, the IRS provides no formula to assess the amount of lobbying that is not “substantial.” The absence of clear guidance is problematic, since organizations that conduct too much lobbying pay a heavy price –the imposition of excise taxes on lobbying expenditures (except for churches, which are not subject to the tax) and possible loss of tax-exempt status. So how much can you up your game without risking a crash landing?
A Way to Stick Your Landing
In response to the vagueness problem, IRS regulations were changed about 30 years ago to permit charitable organizations other than churches to use an “expenditure test” as an alternative method for measuring lobbying activity. The basic requirement still applies — no substantial part of an organization’s overall activities may be directed at influencing legislation — but a formula could now be used to measure how much is allowable.
Under the expenditure test, an organization will not jeopardize its tax-exempt status if its lobbying expenditures averaged over a four-year period do not exceed a specified percentage of the organization’s total expenditures on exempt activities (“exempt purpose expenditures”), up to an annual maximum of $1 million.
…but it’s Still a Steep Slope
The expenditure test provides certainty, but it’s complicated. The calculation involves sliding scales, multi-year averaging, rules on the allocation of different types of expenditures and, of course, exceptions to the rules. The expenditure test counts some lobbying activities differently from others. The IRS provides a chart that sets out allowable lobbying expenditures based on total exempt purpose expenditures. An organization that wishes to use the expenditure test must first file an election form, and then maintain and file annual detailed records of activities and expenditures. If the limits set by the expenditure test are exceeded over a four-year period, the organization’s tax-exempt status may be revoked.
Choosing the Best Path
Like a downhill skier, you still need to choose the best path. Electing to use the expenditure test provides certainty, but some aspects of the expenditure test calculation may put you in a worse position than tolerating some uncertainty on the “no substantial” part test. For example, an organization’s long term lobbying strategy might affect whether it wishes to be assessed on a one year basis (under the no substantial part test) versus a four year basis (under the expenditure test). An organization that plans to lobby using volunteers rather than employees might elect the expenditure test, which does not count volunteer time, versus the no substantial part test which does. An organization that wants to do “grassroots” lobbying (appealing to the public to request action on legislation) as opposed to “direct” lobbying (appealing to government officials who have the ability to act on legislation), might choose not to elect the expenditure test because the expenditure test places greater limitations on grassroots lobbying than the no substantial part test. The decision as to which test to choose is different for each organization and should be considered carefully.
Other Mountains to Tackle
Assuming you can manage the federal regulations on lobbying, there are other challenges ahead of you. States separately regulate lobbying on the state and local levels. A discussion of Massachusetts law on this subject may be found here on my website.
Choosing to lobby as a nonprofit organization can seem daunting, but with planning and forethought you can pursue a limited amount of lobbying and retain your tax-exempt status. As good as gold.
Ellen Lubell provides guidance to nonprofit leaders on regulatory compliance, risk management, governance, fundraising, and best practices for preserving tax-exempt status.