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Lobbying, Political Activity, and Tax-Exempt Status
December 2009 — For many 501(c)(3) entities and 501(c)(6) associations, lobbying and other political-related activity may be an important means of carrying out the organization's mission. In order to protect their tax-exempt status, however, such organizations must remain mindful of, and consistently compliant with, IRS rules regarding lobbying as well as federal and state election laws.
501(c)(3) Organizations
501(c)(3) organizations are permitted to engage in lobbying, although the extent of their lobbying activity is limited by federal tax law. A 501(c)(3) entity must either limit its lobbying activity to an "insubstantial part" of its activities - a very vague test - or it can measure its lobbying activity by the 501(h) expenditure test. Organizations that make the "501(h) election" may be able to spend up to $1 million on lobbying, depending upon the size of the organization. The IRS encourages organizations to make the 501(h) election, and organizations that do so remain fully tax-exempt under Section 501(c)(3) of the Code.
Organizations that make the 501(h) election must also understand the difference between "direct lobbying" and "grassroots lobbying." Direct lobbying includes communications that take a position on legislation with members of the legislature, or communications with the general public regarding particular ballot measures. Grassroots lobbying consists of communications with the public that express a view regarding specific legislation and that include a "call to action," such as contacting legislators and their staffs. Organizations making the 501(h) election may spend their entire lobbying limit on direct lobbying, but only up to one quarter of their lobbying limit on grassroots lobbying.
Included in the lobbying limits (with a few exceptions) is any financial support extended to an affiliated non-501(c)(3) entity that is engaged in lobbying.
Finally, there are certain types of political activity in which 501(c)(3)s may not engage, such as endorsing candidates for public office or establishing PACs. Other political activity, such as get-out-the-vote drives or publishing voter guides, may be permissible if they are conducted in a non-partisan manner and are careful not to favor or oppose any candidate for public office.
501(c)(6) Organizations
501(c)(6) organizations do not face federal limits on their lobbying expenditures. It should be noted, however, that membership dues paid to trade and professional associations cannot be treated as fully tax-deductible business expenses if the organization has lobbying and political activity expenditures. Organizations must either report to their members annually the percentage of their dues that are tax deductible, or the organization can elect to pay a "proxy tax" directly to the IRS.
Unlike 501(c)(3)s, a 501(c)(6) can be much more partisan in its political activity. For example, a 501(c)(6) organization can express support for specific candidates for public office when such support is communicated to the organization's members or to its media contacts, but not directly to the general public.
Finally, it should be noted that both 501(c)(3) and 501(c)(6) organizations may be covered by the registration requirements of the Lobbying Disclosure Act of 1995 if they meet certain thresholds.
For more information regarding lobbying and political activity and the maintenance of your organization's tax exempt status, please contact our offices.
This information is not intended to constitute, and should not be considered, legal advice. This article is provided as general information that may or may not reflect the most current legal developments.
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