9 Questions About the 501(h) Election
I’ll come right out and admit it: I’m an evangelist for the 501(h) election. Why? I think it gives public charities enormous peace of mind.
It allows them to lobby without fear of violating their tax-exempt status. The 501(h) election is a straightforward way for a charity to measure it’s lobbying. It sets specific dollar limits—calculated as a percentage of a charity’s total exempt purpose expenditures) and clear definitions of lobbying—both of which provide a charity a clear picture of the amount it may spend to influence legislation without losing its exempt status or incurring penalty taxes.
I sometimes compare the alternative to the 501(h) election (called the insubstantial part test) as a little like driving down a highway without posted speed limits—since it is a vague standard, its lack of posted speed limits tends to to inhibit public charities from doing as much lobbying as they could under 501(h). Under 501(h), instead of a charity worrying about when it has done too much lobbying, with its clear definitions and limits, a charity can direct its energy into plotting how to use the legislative process to advance its mission.
In our collective experience here at AFJ, we have seen groups that make the 501(h) election feel more comfortable lobbying within the generous limits set out in the law.
9 Frequently Asked Questions About the 501(h) Election
1. What is 501(h)?
501(h) is a section of the Internal Revenue Code that outlines one of two tests for measuring an eligible 501(c)(3) organization’s lobbying expenditures. Sometimes called the―expenditure test or the―20% rule, 501(h) was enacted in 1976 to clarify the much-criticized―insubstantial part test that the IRS has used since 1934. 501(h) establishes specific dollar limits that are calculated as a percentage of a charity’s total exempt purpose expenditures (tax-exempt budget). Under 501(h), a charity may use up to 20% of the first $500,000 of its exempt-purpose expenditures to lobby. For organizations with larger budgets, this dollar amount increases, on a sliding scale, to a maximum of $1 million.
2. Why should a 501(c)(3) elect 501(h) status?
I’m glad you asked!
a) Because 501(h) provides more generous lobbying limits than the―insubstantial part test.‖
b) Because the 501(h) test is clear and easy to calculate.
c) Because there are clear definitions of various kinds of lobbying communications.
d) Because volunteer and other efforts that do not cost the organization money will not count toward the exhaustion of the lobbying limits.
e) Because an electing charity cannot lose its exemption for a single year’s excessive expenditures, while a non-electing charity can.
f) Because there is no personal penalty for individual managers of an electing charity which exceeds its lobbying expenditure limits.
g) Unlike under the insubstantial part test, communications with the general public about specific legislation do not count as lobbying under 501(h), unless they contain a call to action.
3. How does a 501(c)(3) charity elect 501(h) status?
Completing the single page form, IRS Form 5768 ―Election/Revocation of Election by an Eligible 501(c)(3) Organization to Make Expenditures to Influence Legislation, does the job.
It requires only the organization’s name, address, and the first tax year to which the election will apply. A copy of Form 5768 is on page 10 of Worry-Free Lobbying.
4. Will foundations suffer consequences if their grantees exceed lobbying limits?
No. Foundations will not be penalized for grantees that make the election and exceed their lobbying limits.
5. Under 501(h), what is lobbying?
Under 501(h), there are two types of lobbying, and each has a very specific and narrow definition. Direct lobbying is a communication with a legislator, or their staff, that expresses a view about specific legislation. Grassroots lobbying is a communication with the public that expresses a view about specific legislation and includes a call to action, asking or suggesting to the public that they contact a legislator.
More detailed information can be found on pages 6-7 of Worry Free Lobbying, along with applicable exceptions and expenditure limits.
6. How much can a charity spend on lobbying under 501(h)?
As noted in the answer to Question 1, up to 20% of the first $500,000 of its exempt purpose budget can be spent on direct and grass roots lobbying combined. Grass roots lobbying expenditures are capped at one quarter of the organization’s overall combined lobbying limit, regardless of how much it actually spends on direct lobbying. Thus, an organization with a $100,000 exempt purpose budget can spend up to $20,000 on direct and grass roots lobbying combined, but no more than $5,000 on grass roots lobbying.
7. Will election of 501(h) status increase the likelihood of an IRS audit?
Absolutely not. Former IRS Exempt Organizations Division Director Marcus Owens says: “Some concern has been expressed that making the election under section 501(h) will increase the possibility that a charitable organization will be examined by the Internal Revenue Service. I can state emphatically that is not the case.” See also page 12 of Worry Free Lobbying for the comments of a number of distinguished tax practitioners on the topic.
8. Will our paperwork increase if we elect 501(h) status?
No. In fact, if may diminish. All public charities, regardless of status, with receipts greater than $25,000 file Form 990. If your organization lobbies, you also already complete Schedule A of Form 990. This will not change with 501(h) election, but you will no longer need to track and report volunteer lobbying activities and, with the clear definitions of lobbying activities provided by 501(h), you will be more confident about the expenditures which must be reported.
9. What about losing a tax exemption for excessive lobbying expenditures under 501(h)?
Only electing organizations that exceed their limits over a 4-year period run the risk of losing their tax exemption. The IRS considers an electing charity’s lobbying expenditures as a moving average over a four-year period, while a non-electing group could lose its exemption for a single year’s excessive expenditures.
Find more answers to questions you didn’t even know you had about the 501(h) in Worry-Free Lobbying.