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Say Goodbye to the Guesswork: Understanding Your Lobbying Limits With the 501(h) Election

Updated: Aug 4, 2023

So now that you know nonprofits can lobby, how do you safely lobby without jeopardizing your tax exempt status?

With a little something called the 501(h) election.

The History of the 501(h) Election


The 501(h) election was created by Section 501(h) of the tax code, which essentially states that nonprofits can lobby without jeopardizing their tax exempt status as long as their direct lobbying and grassroots lobbying expenses are less than the limits outlined in Section 4911 of the code.

Before 501(h) was added to the tax code in 1976, nonprofits could lobby as long as their lobbying activities were insubstantial.


But as I discussed briefly in one my earlier posts, there is no clear definition of “insubstantial,” which has caused nonprofits to shy away from lobbying altogether.


Congress recognized the effect of the law’s ambiguity, so in an effort to encourage nonprofit lobbying, it made it easier for nonprofits to “come out of their shell," so to speak, by allowing them to determine their lobbying limits based on their annual expenses.


Essentially, Section 501(h), and specifically Section 4911, took all the guesswork out of determining how much lobbying was allowable for 501(c)(3)s.


And believe it or not, the lobbying expense limits are actually quite generous.


Let’s take a look at what they are below.


Lobby Expense Limits for Direct Under 501(h)


Overall Lobbying Limits


Here’s a table of the overall lobbying expense limits under 501(h) below:



Don't let the phrase "exempt purpose expenditures" scare you.


It's just a fancy term for the amount of money your organization spends to fulfill its mission – overhead, programming, and fundraising expenses.

The first row of the chart is pretty simple.


If your organization spends $500,000 or less a year on exempt purpose expenditures, it can spend 20% of those total expenses on lobbying.

But some of the language in the next three rows can be a little confusing, so let me explain.

If you look at the second row, for example, you’ll see that organizations spending over $500,000 and under $1,000,000 can spend $100,000 on lobbying, plus 15% of the excess of the exempt purpose expenditures over $500,000.

In plain English, this simply means that an organization in this category can spend $100,000 plus 15% of any amount in excess of $500,000 on lobbying.


Confused?


Let's look at an example:


Let's say Nonprofit A spends $560,000 a year on overhead, programming, and fundraising expenses. According to row two of the chart, it can spend $100,000 plus 15% of $60,000, which is the amount of its expenses that is in excess of $500,000. Fifteen percent of $60,000 is $9,000, so Nonprofit A can spend $109,000 ($100,000 + 9,000) on lobbying.


The same math would be used to figure out limits for organizations falling under row three and four of the chart.


Math not your strong suit? 😊


No problem.


Shoot me an email, and I can help you figure your organization’s lobbying limits.

Grassroots Lobbying Limits


For all 501(c)(3)s that take the election, the grassroots lobbying limit is 25% of their overall lobbying limit.


So if, for example, an organization can spend $100,000 on lobbying overall, it can spend up to $25,000 of that amount on grassroots lobbying.



Direct Lobbing v. Grassroot Lobbying Defined


The 501(h) election requires you to keep track of two different types of lobbying – direct lobbying and grassroots lobbying. If you need a refresher on the difference, here are the basic definitions:

Direct lobbying is direct communication with a legislator (or the legislator's staff member) to influence his or her decision to introduce, support, or oppose specific legislation.


  • Example: Meeting with a legislator to influence him or her to vote for a bill increasing penalties for drunk driving

Grassroots lobbying involves informing the public about specific legislation and encouraging the public to contact legislators to influence their vote on it.


  • Example: Running a campaign asking community members to call their legislators to ask them to vote for a bill increasing penalties for drunk driving.


So with direct lobbying, the organization or a representive of the organization contacts a legislator to influence that legislator's decision on specific legislation.


With grassroots lobbying, an organization rallies the public around legislation, and encourages the public to contact a legislator to influence his or her decision.


Both are lobbying because they involve communication with a legislator about specific legislation.


The difference is who is doing the communicating - either the nonprofit itself or members of the general public.


Going Over the Limits


In addition to making it easier for nonprofits to figure out their allowable lobbying amounts, the tax code makes it more difficult for nonprofits to lose their tax-exempt status if they “overlobby.”


Instead of revoking an organization’s tax-exempt status if it goes over either its direct lobbying or grassroots lobbying limit during any particular year, the IRS requires it to pay a tax equal to 25% of the amount it goes over the limit.


So if an organization with an annual direct lobbying limit of $100,000, for example, goes over its limit and spends $101,000, it will have to pay a tax of $250 (25% of 1,000).

An organization will lose its tax-exempt status only if it goes over at least 150% of either its total lobbying expense limit OR its total grassroots lobbying expense limit over a four year period.

At that point, all of the nonprofit’s lobbying income will be taxed.


Taking the 501(h) Election by Filing IRS Form 5768


You may have noticed earlier that the ability to measure lobbying limits based on annual expenses is called the 501(h) election.


That’s because to have your allowable lobbying activities measured by the Section 4911 expense limits, you have to elect to use those limits by filing IRS Form 5768 annually at any time during the tax year.


If you don't take this election, your lobbying activites are measured by the insubstantial test by default.


But lucky for you, unlike almost every other tax form on the planet, Form 5768 is easy to fill out.


And you don’t have to file it every year.


It’s effective every subsequent year after you file it until you revoke it using the same form.

Here’s a copy of Form 5768 below:



The only information you need is your nonprofit's name, address, and EIN.

No 501(h) Election for Private Foundations or Churches


Unfortunately, private foundations, churches, and organizations affiliated with and funded by churches cannot take the 501(h) election.


In fact, private foundations, are not permitted to lobby at all.


But they are a major funding source for 501(c)(3)s and can grant money to them as long as the grants are not specifically earmarked for lobbying.

Churches, on the other hand, can lobby, but their lobbying limits are governed by the insubstantial test.


Churches should remember, though, that lobbying is not the only form of advocacy.


They are permitted to engage in issue advocacy by taking public positions on issues that affect their community or congregation – as long as their advocacy does not cross over into support or endorsement of a political candidate.


Wrapping It Up


So as you can see, taking the 501(h) election is incredibly beneficial for nonprofits that want to do significant lobbying.


It allows nonprofits to be confident of their limits, and makes it difficult for them to lose their tax exempt status unless they repeatedly engage in excessive lobbying over an extended period.


With the 501(h) election, there's not much standing in a nonprofit's way, except for, of course, the big "f-word"...


Funding. :)


I'll talk more about how nonprofits can get the funding they need build a great advocacy team, run effective public education campaigns, and meet with legislators soon.


But if you have any questions about your organization's lobbying limlits, email me at info@advocateimpact.com.


As usual, I'm happy to help.

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