The current political climate has landed tax advisors in an unpleasant quandary, forcing them to be the bearer of both good and bad news. The good news is most taxpayers are expected to benefit from the current administration’s plans to lower tax rates. The bad news, for tax-exempt, 501(c)(3), charitable organizations (“Non-profits”), are the multiple threats that include limiting charitable donation deductions and plans to reduce government spending. Plans to minimize government spending include cutting the Departments of Commerce and Energy; the Departments of Transportation, Justice and State; the Corporation for Public Broadcasting, the National Endowment for the Arts, the National Endowment for the Humanities and potential cuts to Medicare. Many Non-profits could be affected by reductions or possible elimination of funding for the essential services they provide.
Non-profits are challenged to stretch exempt purpose assets and cannot afford to divert scarce financial and human resources from their core mission. At the same time, there is an urgent need to take advantage of the current tax law that permits Non-profits to engage in issue advocacy and lobbying in order to preserve critical government support.
Non-profits that conduct “substantial” lobbying activities run the risk of losing their tax-exempt status. Organizations that make a 501(h) election are limited to statutory spending limits for lobbying expenses and are subject to an excise tax on expenditures exceeding those limitations (see summary below).
There are two methods of determining whether a Non-profit has exceeded lobbying expense limitations. The first is based upon whether lobbying activity and related expenses are “insubstantial” in relationship to the other exempt purpose activities of the Non-profit. There is no bright-line test for determining “insubstantial,” rather it is subjective, based upon facts and circumstances. The second method is based upon the 501(h) election. Non-profits can file Form 5768, “Election/Revocation of Election by an Eligible Section 501(c)(3) Organization to Make Expenditures to Influence Legislation,” which applies an “expenditure test” that provides clear lobbying expense limitations (capped at a maximum of $1,000,000) as follows:
Lobbying expenses are incurred when a Non-profit engages in activities that attempt to influence any legislation through communication with legislators, employees of a legislative body, or other government official that refers to specific legislation and reflects a view on such legislation (IRS Sec. 4911(d)(1)(B)). Lobbying activities include sending letters or publications to government officials or legislators; meeting with or calling government officials or legislators; sending or distributing letters or publications to the general public; using direct mail, placing advertisements, issuing press releases, holding news conferences, or holding rallies or demonstrations. Direct contact is a personal telephone call or visit with legislators, their staffs, or government officials (see chart below).
Lobbying expenses also include grass roots lobbying which is any attempt to influence any legislation through an attempt to affect the opinions of the general public or any segment thereof. Grassroots lobbying communication refers to specific legislation, reflects a view on such legislation and asks the recipient to take action with respect to the legislation. Grassroots lobbying expenses have to encourage the public to take action in regards to the legislation.
We have summarized a number of generic examples below to clarify the differences between advocacy, lobbying and grassroots activities.
Note that grassroots lobbying expense limitations are significantly less than direct lobbying expenses with a 501(h) election so an evaluation of the planned activities and expenses is essential to avoid exceeding the limits.
Non-profits need to implement procedures to accurately account for lobbying expenses. Most of the popular accounting software packages have a “project,” “program” or “class” feature that is very useful in tracking lobbying expenses. Direct lobbying costs include advertising; postage; printing; travel to meetings with legislators, their staff, government officials; and events. In addition to these direct costs are allocable staff salaries. Procedures to account for lobbying expenses should include a process for documenting staff time allocable to lobbying. Existing systems to account for staff time allocable between program activities can be modified to include lobbying activities. In addition to maintaining good accounting records to substantiate lobbying expenses, descriptions of lobbying activities (*listed above) are required to be reported on Form 990, Schedule C. Non-profits should consider maintaining a calendar or log to document lobbying activities.
Volunteers can be valuable to Non-profits with scarce resources because their time is not taken into consideration if the 501(h) is made. If a Non-profit relies heavily upon volunteers to conduct lobbying activities, the organization could run afoul of the “insubstantial” guidelines and jeopardize its tax-exempt status. Accordingly, a Non-profit that does not expect to expend more than the 501(h) election limitations that uses volunteers for lobbying activities should consider making a 501(h) election. An election is effective for all taxable years which end after the date the election is made, so elections made in 2017 prior to December 31, 2017 are effective for 2017, until revoked.
In this especially divisive political climate employees use of the Non-profit’s email or phone for personal political causes should be strictly prohibited. Use of email or phone on “Company” time could result in unexpected lobbying expenses that cause the Non-profit to exceed the statutory expenditure limits and jeopardize the exempt status of the organization.
Non-profits are also prohibited from participating or intervening in any political campaign on behalf of or in opposition to any candidate for public office. The proposed repeal of this prohibition, known as the “Johnson Amendment”, is a current source of public debate. Non-profits that communicate and ask recipients to take action with respect to this current legislation are conducting lobbying activities and incurring lobbying expenses.
Bear in mind that the Department of Labor Overtime Rules, whose adoption was postponed in December 2016, do not permit paid employees to volunteer to perform the same type of services to the Non-profit that they are otherwise employed to provide. This does not prohibit those same paid employees from participating in lobbying activities on a volunteer basis, if they don’t perform lobbying activities as a part of their job description.
Non-profits should consult with their professional advisors to determine whether activities are advocacy, lobbying or grassroots based on the specific facts relevant to the activity to ensure that the Non-profit correctly accounts for the related expenses. It is important to properly monitor expenditures and ensure the expenses are “insubstantial” in relation to the organization’s activities as a whole or are within the parameters of the 501(h) election limitations.
If you would like more information, please contact your professional advisor at Friedman.
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