501(h) election

The Internal Revenue Service (headquarters pictured) regulates lobbying by tax-exempt organizations. Most 501(c)(3) organizations may switch from a subjective "substantial part test" to an objective "expenditure test" by making a 501(h) election.

501(c)(3) organizations, named after the section of the Internal Revenue Code that defines them, are the most common category of nonprofit organization in the United States. They make up 74% of all tax-exempt organizations as of 2013, encompassing organizations with charitable, educational, or religious missions.[1]

By default, 501(c)(3) organizations are subject to a provision that "no substantial part of the activities [may be] carrying on propaganda, or otherwise attempting, to influence legislation". This test, called the substantial part test, is subjective and not precisely defined by the IRS, making it difficult for organizations engaging in policy advocacy to determine whether they are in compliance with the law. Under the 501(h) election, this is replaced with an objective expenditure test based only on the annual financial expenditure, with no other limits on the actual extent of the lobbying activities. An organization may take the 501(h) election by filing a one-page form with the IRS, which remains in effect until revoked by the organization.[2][3] The 501(h) election is not available to churches or to private foundations.[4]

Lobbying is defined as attempting to influence legislation, and is divided into two categories. The first, direct lobbying, occurs through communication with any member or staff of Congress, or of a state or local legislature, or any government official participating in the formulation of legislation. The second, grassroots lobbying, is attempting to affect the opinion of the general public on legislation, although some communications to an organization's own members are excluded from this classification.[3][5][6]

The limit on lobbying expenditure is calculated as a fraction of the organization's total tax-exempt expenditures. For organizations with $500,000 or less of total tax-exempt expenditures in a given year, no more than 20% of that amount may be spent on lobbying. Decreasing percentages are allowed for organizations with higher tax-exempt expenditures, with an absolute spending cap of $1,000,000 eventually being reached. Lobbying expenses above the allowed amount are subject to a 25% excise tax, and excessive lobbying over a four-year period may lead to loss of tax-exempt status.[4] This cap applies to the sum of direct and grassroots lobbying expenses. Grassroots lobbying is also subject to its own limit, which is one quarter of the total lobbying cap.[3][5] Regardless of their 501(h) status, 501(c)(3) organizations may not participate in electoral campaigns or support specific candidates for office, a prohibition that has been in effect since the passage of the Johnson Amendment in 1954. Also, funds derived from federal government or private foundation grants or contracts may never be used for lobbying.[7][8][9]

The expenditure caps provide a safe harbor for non-profit organizations engaging in policy advocacy. Because the limitation is expressed solely in terms of dollar amounts, organizations can effectively perform a large amount of lobbying if it is done through volunteer labor or through inexpensive media such as email or websites.[10] However, the 501(h) election is not advantageous for very large non-profits whose lobbying expenditures exceed the $1,000,000 total cap or the $250,000 grassroots lobbying cap. These organizations may still be able to justify the expenditures as insubstantial if their operating budget is much larger, although it does entail increased risk.[2]

Multiple commentators have called non-profit lobbying beneficial because it balances lobbying by for-profit corporations. Tufts University political science professor Jeffrey Berry wrote in The Washington Post that, given that many non-profits are health care or social service providers, "they are the foot soldiers in a largely private system that delivers critical services to the disadvantaged. They are often closer to the problems—and the solutions—than the policymakers in city halls, state capitals and Washington."[11] In initially enacting the provision, Congress intended to increase the flow of information from non-profits to the legislative process. Senator Edmund Muskie said of an early version of a lobbying reform bill in 1971 that "it is fundamental to our constitutional system that [tax-exempt organizations] should have equal access along with business groups and others in presenting views to Congress."[10]

Nevertheless, as of 2009, only 1.3 percent of eligible 501(c)(3) organizations had taken the 501(h) election according to one count.[10] A 2003 survey of non-profits found a widespread but erroneous belief that non-profit organizations were banned from political advocacy of any sort, with little awareness of the 501(h) election.[11] This was attributed to the long gap between the provision's enactment by Congress in 1976 and the publications of final rules by the IRS in 1990 and the complexity of the 501(h) provisions,[10] as well as the IRS's lack of interest in publicizing the provision.[11]

A 2013 survey of executive directors of non-profit organizations in Boston found that the organizations were 6.3 times more likely to engage in policy advocacy if they had taken a 501(h) election than those who did not.[12]