During election season, your city's small business network, your library's fundraising entity and even your school's charitable fund might promote a ballot measure, educate voters on an issue or engage in some other type political activity. Under the IRS Code, these nonprofits and many others are legally permitted to engage in limited political activities. Permissible activities include:
Nonpartisan voting registration
Promoting public policy
Contributing to a ballot measure
Nonprofits can undertake these activities so long as they do not a) directly participate, b) indirectly participate, or c) intervene in a political campaign on behalf of or in opposition to any candidate for public office. Political activities are, however, limited to an expenditure amount. The limit depends on the nonprofit's IRS classification.
Nonprofits Organized Under IRS Code Section 501(c)(3)
Most taxpayers are familiar with nonprofits organized under IRS Code Section 501(c)(3). Donations to private schools, Churches, after school youth programs, and other 501(c)(3) nonprofits are normally tax deductible. This class of nonprofits, often referred to as "public charities," includes charitable, religious, scientific, literary, and other organizations.
Public charities can engage in certain political activities so long as the activity expenditures remain within certain thresholds.
Expenditure Test: Public charities that file a 501(h) election are subject to an expenditure test. Under the expenditure test, the extent of an organization’s lobbying activity will not jeopardize its tax-exempt status, provided its expenditures, related to such activity, do not normally exceed an amount specified in section 4911. This limit is generally based upon the size of the organization and may not exceed $1,000,000.
Substantial Part Test: Public charities that do not file a 501(h) election are solely subject to a substantial part test. Under this test, excessive lobbying activity is determined by facts and circumstances (we almost always recommend public charities file a 501(h) election due to the vague definition of "facts and circumstances").
Under the expenditure test, an organization that engages in excessive lobbying activity over a four-year period may lose its tax-exempt status, making all of its income for that period subject to tax. Should the organization exceed its lobbying expenditure dollar limit in a particular year, it must pay an excise tax equal to 25 percent of the excess.
Under the substantial part test, an organization that conducts excessive lobbying in any taxable year may lose its tax-exempt status, resulting in all of its income being subject to tax. In addition, section 501(c)(3) organizations that lose their tax-exempt status due to excessive lobbying, other than churches and private foundations, are subject to an excise tax equal to five percent of their lobbying expenditures for the year in which they cease to qualify for exemption.
An organization that has lost its section 501(c)(3) status due to substantial attempts to influence legislation may not thereafter qualify as a section 501(c)(4) organization.
Nonprofits Organized Under IRS Code Section 501(c)(4)
Certain chapters of Black Lives Matter as well as some Police Foundations are not public charities. Instead, they are organized under IRS Code Section 501(c)(4). Different from a public charity, a section 501(c)(4) social welfare organization may further its exempt purposes through lobbying as its primary activity without jeopardizing its exempt status. Some public charities, such as Focus on the Family and Planned Parenthood, create a separate 501(c)(4) to engage in political activity.
It is important to note that charitable donations to nonprofits organized under IRS Code Section 501(c)(4) are not deductible.
A section 501(c)(4) organization that engages in lobbying may be required to either provide notice to its members regarding the percentage of dues paid that are applicable to lobbying activities or pay a proxy tax. For more information, see Lobbying Issues PDF .
New legislation enacted at the end of 2015 requires an organization to notify the IRS of its intent to operate as a Section 501(c)(4) organization. The IRS has developed a new form – Form 8976 – that organizations should use to provide this notification.
Private foundations cannot engage in grass roots or direct lobbying. Legislative research, communication made to influence a judicial decision, and other forms of communication might be permissible under IRS Code Section 501(h).
Political campaign and lobbying activities are reported on Form 990, Schedule C. Schedule C, as well as the rest of the form, is subject to public disclosure. Political nonprofits with taxable political income (newsletter income, certain investment income, etc.) are also required to file Form 1120-POL. For more information, contact The Little CPA.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers before engaging in any transaction.