Noncharitable nonprofits include all tax-exempt organizations that are not charities: trade associations, social welfare organizations, labor unions, fraternal organizations, title-holding companies, VEBAs, and a variety of others. Whereas a public charity, which is classified under Internal Revenue Code Section 501(c)(3), is forbidden from engaging in politics and is limited in the amount of lobbying it can do, a noncharitable tax-exempt organization may engage in political activity and unlimited lobbying.
Generally, lobbying is a communication designed to influence the passage or defeat of a piece of legislation:
What is the Difference Between Direct and Grassroots Lobbying?
Grassroots lobbying is a call to action that attempts to motivate the public to contact legislators to support or oppose specific a piece of legislation.
Direct lobbying involves contacting a member of a federal, state, or local legislative branch in an attempt to affect the passage or defeat of legislation. Note that an attempt to influence the public’s support or opposition to a referendum or ballot initiative are classified as direct lobbying since the organization is attempting to influence the public where the public is acting as a legislative body.
What is Not Lobbying?
How much lobbying can a noncharitable tax-exempt organization do?
There is no limit. For example, a tax-exempt 501(c)(6) organization is operated primarily to promote a common business interest and to better the business conditions of one or more lines of business even if its sole activity is directed to the influencing of legislation which is germane to such common business interest. In some situations, the objectives of the organization can only be attained through the legislative process. For a 501(c)(4) organization, lobbying may be the actual mission. 501(c)(3) public charities often create a social welfare organization to use it to engage in unlimited lobbying.
Reporting Lobbying on Form 990
Although member dues to a noncharitable tax-exempt organization may be deductible as an ordinary and necessary business expense, lobbying activities are not deductible. Therefore, the organization must inform members that they may not deduct the portion of the dues that the organization spends on lobbying. It does not matter if the organization has other sources of revenue from which to draw; it is assumed that the lobbying expenditures are entirely made from the membership dues revenue.
When membership dues are assessed, the tax-exempt organization must estimate the portion of the dues that will be nondeductible because the organization will make lobbying expenditures during the year. Then at the end of the year, the organization determines the actual lobbying expenditures incurred and compares that to the estimated lobbying activity from the dues invoices. A modest deficit may be carried over to the subsequent year.
Example: The nonprofit estimates that 15% of membership dues will be nondeductible as lobbying expenditures, and notifies members on the dues invoice at the beginning of the year. At the end of the year, the organization has membership dues revenue of $1,000,000 and actual lobbying expenditures of $170,000 (17%, rather than 15%). Therefore, the organization has allowed its members to deduct, in the aggregate, 2%, or $20,000, more than they are entitled to deduct. The organization may carry the deficit forward and include it in the calculation for the subsequent year. If it anticipates that the lobbying activity will again be approximately 17% of total dues revenue, then it may wish to notify members in the subsequent year that 19% is nondeductible in order to cover the previous year’s deficit.
Alternatively, the nonprofit organization may choose to pay the tax on behalf of its members, called a “proxy tax.” The tax rate is 21%, no deductions are permitted, and estimated payments are not required. The organization calculates the difference between the estimate it provided to its members, which in some cases is 0%, and the actual lobbying expenditures, and reports the deficit on Form 990-T instead of carrying it over to the subsequent year.
There are two situations where a nonprofit organization is not required to notify its members that a portion of the membership dues is nondeductible:
Calculating Lobbying Expenditures
The tax-exempt organization must retain documentation of all lobbying activities and communications. Timesheets and cost logs should support the calculation, including the cost of research, drafting, reviewing, copying, printing, publishing, and distributing the communication. Care must be used to differentiate member communications with non-member communications, and mixed-purpose communications (such as a fundraising appeal that also includes a call to action) must be segregated.
The nonprofit must use a reasonable and consistent method for allocating overhead to its lobbying activities. The IRS has identified specific pre-approved methods for determining lobbying expenses:
Political Campaign Intervention
What is Political Activity?
Generally, political activity is a communication designed to influence the election or defeat of a candidate for political office, including:
What is Not Political Activity?
How much political activity can a noncharitable tax-exempt organization do?
Political activity must not become the tax-exempt organization’s primary purpose. The most aggressive interpretation would conclude that no more than 49.9% of the organization’s activities can be political, while a more conservative view would be that the political activity must not be the largest activity undertaken by the organization.
Reporting Political Activity on Form 990
All expenditures for political activity, including amounts paid to a 527 organization (a political action committee or PAC), must be reported on Form 990 Schedule C Part I. In addition, the organization must file Form 1120-POL and pay income tax on the lesser of it’s:
Effectively the nonprofit organization is not permitted to treat investment income as tax-exempt to the extent that such income was spent on political activity. The tax rate is 21%. Form 1120-POL has a $100 specific deduction, so an organization with less than $100 of either investment income or political expenditures is not required to file Form 1120-POL.
Calculating Political Expenditures
The tax-exempt organization must use a reasonable and consistent method for allocating overhead to its political activities. The IRS has identified the same pre-approved methods for determining political expenses as those described above under “Calculating Lobbying Expenditures.”
What is a PAC?
Organizations described in IRC 527 have political activity as their primary exempt purpose:
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