501(c)(3) organizations often engage in a variety of advocacy efforts to advance their missions. The extent to which this engagement is permissible depends on the answers to several vital questions.
[Caution! Be aware that other federal, state, and local laws requiring lobbyist registration and reporting often have different definitions and rules from those discussed in this summary. Compliance with the 501(c)(3) rules does not guarantee compliance with those other rules. Your organization should consult with qualified lobbying counsel for guidance on compliance with those rules.]
1. Is it Even “Lobbying”?
The 501(c)(3) rules define “lobbying” in various ways, each of which relates to legislative action. This can take several forms, including a local ordinance at the city council, the state budget in the state legislature, or even a referendum to be voted on by the public.
2. Public Charity or Private Foundation: Can You Lobby?
A 501(c)(3) organization that also is classified as a “public charity” is permitted to engage in and fund lobbying activities so long as they remain an “insubstantial part” of the organization’s overall activities. If the activities become more than an insubstantial part, the organization will lose its 501(c)(3) status.
A 501(c)(3) organization that is classified as a “private foundation” may not engage in or fund any lobbying activities. Doing so will result in costly penalty taxes and may result in the loss of the organization’s 501(c)(3) status.
3. Which Test Applies?
As noted above, a 501(c)(3) organization that is a public charity is permitted to lobby. The extent to which it may do so depends on whether it is subject to the “insubstantial part” test or the “expenditure test.”
The default, “insubstantial part” test is a subjective test without clear guidance. It looks at overall activities, including expenditures, volunteer time, and overall effort. It is the test favored by organizations that do very little or infrequent lobbying, or by very large organizations for which the “expenditure test” limits would be too small.
The alternate “expenditure test” offers objective guidelines based on an organization’s budget. It looks only at expenditures. This test provides an organization with more clarity regarding the extent to which it can engage in lobbying without jeopardizing its 501(c)(3) status. An organization files an election with the Internal Revenue Service (the “501(h) election”) to be governed by this test.
Which test makes the most sense for a particular organization depends largely on the organization’s unique circumstances, though many organizations ultimately prefer the predictability and comfort offered by the expenditure test.
4. Does an Exception Apply?
There are certain important exceptions to the definition of lobbying for purposes of the 501(c)(3) rules:
- Nonpartisan research, study, or analysis
- Technical advice provided to a governmental body
- Self-defense communications
- Examinations of broad social, economic, and similar problems
Determining whether any of these exceptions apply requires a highly fact-specific analysis. If an exception applies, then a public charity can engage in the activity without it counting against the organization’s lobbying limits, and a private foundation can engage in the activity without triggering a costly penalty tax.
5. Is There an Alternative?
There is an important, often-overlooked alternative: general operating grants to other 501(c)(3) organizations. A private foundation can make a general operating grant to a public charity that lobbies without triggering the private foundation penalty taxes. Similarly, a public charity can make a general operating grant to another public charity that lobbies without needing to track or report it as a grant for lobbying. The key is that the grant must truly be a general operating grant with no strings attached or agreement that the funds be used for lobbying or for a program area that includes lobbying. The grantee public charity must have full discretion on the ultimate use of the funds.
6. Make Sure it Isn’t Campaign Activity!
Remember that although some 501(c)(3) organizations can engage in and fund lobbying, no 501(c)(3) organizations can directly or indirectly engage in political campaign activity. Even a seemingly minor slip-up here can be fatal to an organization’s 501(c)(3) status.
C3 Legal
The Principals at C3 Legal have significant experience with these issues and can advise your organization on how to best navigate these rules. For more information about how we can assist your 501(c)(3) organization, contact us to schedule a consultation.