"A number of years ago some friends and I formed a nonprofit organization to benefit a certain group in our community. It was granted tax-exempt status by the IRS under Section 501(c)(3) of the Internal Revenue Code.
We strongly feel that our mission will be impacted by the outcome of this year's Presidential election. Both our attorney and accountant, however, are telling us we will lose our tax-exempt status if we get involved in any kind of political activity. We see nonprofits lobbying for change all over the place — how do they get away with it?"
This is one of the toughest questions concerning nonprofits, and the IRS rules don't make it easy.
For starters, we need to distinguish between political activity and lobbying activity, as the IRS treats the two very differently.
Political activity is defined as taking sides in an election or other political contest (favoring one candidate over another). If your organization is 501(c)(3), you cannot — cannot — engage in political activity under any circumstances.
Any sort of bias, partisanship or favoritism shown will get you into trouble. Such acts include:
—Hosting an event and inviting a political candidate to make a campaign speech.
—Publishing materials that support (or oppose) a candidate.
—Donating money to a candidate.
—If your organization's executive director makes statements, in his or her official capacity, in support of a candidate.
—Criticizing or supporting a candidate on the organization website.
—Posting a link solely to one candidate's profile on the organization website.
—Inviting one candidate to speak at a well-publicized and well-attended event, and inviting the other candidate to speak at a lesser function.
—Inviting all candidates to speak at an event, but arranging the event or selecting interview questions in such a way that it is obvious your organization favors one candidate over others.
—Conducting a telephone drive in a partisan manner by selecting callers' responses for further follow-up based on their candidate preference.
Your organization may engage in nonpartisan voter-registration drives, nonpartisan candidate debates and nonpartisan voter education as long as these activities fulfill the exempt purpose. Your organization can also engage in legislative advocacy and issue-related advocacy, as long as it does so very, very carefully.
This brings us to lobbying activity. Basically, for IRS purposes, a nonprofit engages in lobbying anytime it attempts to persuade members of a legislative or regulatory body to propose, support, oppose, amend or repeal legislation or regulations.
The vast majority of nonprofits use the IRS substantial part test to determine how much lobbying is permissible. Under this test, a nonprofit will qualify for tax-exempt status as long as no "substantial part" of its activities relates to influencing legislation or publishing propaganda. Unfortunately, though, this has never been clearly defined by either the IRS or the courts.
Just like it determines whether a worker is an employee or an independent contractor, the IRS and the courts weigh a number of factors to determine substantial lobbying, such as the amount of time the directors, officers and staff devote to lobbying, and the amount of money the organization spends on lobbying. For example, one court found that a nonprofit's lobbying was not substantial because it constituted less than 5 percent of the total time spent by the organization's staff (as determined by timesheets). Another court found that lobbying was substantial where lobbying activities exceeded 16 to 20 percent of a nonprofit's total expenditures. Now, it is tempting, but risky to use these figures as a rule of thumb (spending less than 5 percent of the nonprofit's total budget is minor lobbying, while spending over the 16-to-20-percent range is substantial lobbying). There's no guarantee the IRS will use these numbers as rules of thumb in any particular case.
The consequences of devoting too much time and money to lobbying are severe. The IRS can enact any of the following measures:
—Revoke your organization's tax-exempt status for the year, subjecting its entire income to federal and state taxes.
—Deny your donors' tax deductions for their charitable contributions.
—Impose an excise tax on 5 percent of your lobbying expenses, and hold your directors personally accountable for the tax.
If you are unsure whether or not your organization is devoting too much time to lobbying, the IRS does allow you to ask for an informal ruling. You will need to fill out IRS form 5768 (available for free download on the IRS website).
If lobbying will be a significant part of your activities, your organization may need to be reclassified as a social welfare organization under section 501(c)(4) of the Internal Revenue Code. Virtually all lobbying and advocacy groups are formed under this section, which allows organizations to operate tax-free, but does not allow them to accept tax-deductible donations.
Unfortunately, being allowed to raise money tax-free from the public means you may have to stand on the sidelines and grind your teeth between now and November — pretty much like the rest of us.
Cliff Ennico ([email protected]) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com.