It is a time when many in society feel very passionately about political issues and political candidates. Those involved in the mission of non-profit groups care deeply about the well-being of the world and its inhabitants, and so it may be natural for them to care equally about politics.
But before a non-profit organization officially supports a candidate or policy, they would do well to have a firm understanding of the law relating to political activities.
There are 27 different types of non-profits in the Internal Revenue Service (IRS) code, but the most numerous categories are IRS 501(c)(3) corporations (charitable organizations) and IRS 501(c)(4) corporations (social welfare organizations). In general, both 501(c)(3) and 501(c)(4) organizations are exempt from paying federal income taxes.
However, because the regulations regarding political activities are very different for these two types of entities, important decisions must be made when deciding which type of corporation to create.
In short, if you want to start a tax-exempt non-profit with substantial activities supporting candidates or lobbying for policy (legislative) measures, you should form a 501(c)(4). If you are part of an existing 501(c)(3) charity, you should limit the amount of partisan advocacy for policy issues and candidates, or risk fines or even the loss of your non-profit status.
501(c)(3)s and Political Activity
When thinking about 501(c)(3)’s and political activities, it is helpful to think of three categories of activity: political campaigning, legislative or issue advocacy, and non-partisan activities. Let’s consider the latter first.
Non-Partisan Political Activity
501(c)(3)’s can participate in non-partisan political activities that are consistent with their purpose and mission without fear of penalty. For example, a youth-serving non-profit that builds leadership skills or civic engagement could lead a non-partisan voter registration drive.
A 501(c)(3) could also hold information sessions for policy or candidate debates, as long as they are non-partisan (no candidate or side of a policy issue is shown preference) and they show a close connection to the non-profit’s mission.
501(c)(3)s can never engage in political campaigning. That is to say, they cannot support, endorse, or advocate for a particular candidate up for election without penalty.
It is a common practice for elected officials to speak at events of non-profits supporting the community they serve. However, 501(c)(3)s should make sure such official is not making the case for votes or financial support for him/herself.
In general, 501(c)(3)’s can lower their legal risk by not having an elected official or candidate speak while up for election during a campaign season. The IRS uses a “facts and circumstances” test to determine if a non-profit has engaged in political campaigning, meaning they will consider the entire context of such activity.
In general, any activity that explicitly or implicitly gives preference to one political candidate by the organization will be considered political campaigning. Note that this prohibition relates only to official organizational activity, and not to activities of individuals associated with the non-profit outside of official duties.
For example, a non-profit employee or trustee could campaign or raise money for a candidate during their personal time, so long as it is not an organization event, does not utilize the organization’s resources, and is clear he/she was not representing the organization.
Relates Post: Tax Exempt Political Organizations
Legislative or Issue Advocacy
As for advocacy for or against particular legislation (lobbying), 501(c)(3) non-profits can engage in such activities without penalty only if it does not amount to a substantial part of its overall activities.
For example, if an environmental (501)(c)(3) engages in communications or lobbying for the Senate to confirm a nominee for the Environment Protection Agency, such activity must be insubstantial in regard to all its programs and expenditures.
This standard is vague and subjective, but a rule of thumb sometimes used (though not officially endorsed by the IRS) is that if lobbying efforts exceed 20 percent of yearly expenditures, they constitute a substantial part of an organization’s activities. If they are less than 5% of expenditures, they are not substantial.
To minimize risk, a 501(c)(3) would do well to make the 501(h) election to know for sure how much lobbying it can safely engage in. Such non-profits can choose the expenditure test by filling out IRS Form 5768 annually and referring to IRS charts indicating how much they can on spend on lobbying based on their program service budget. For a more detailed discussion of non-profit lobbying, see the Charity Lawyer Blog post Lobbying-Yes You Can!
Even if a 501(c)(3) non-profit takes the 501(h) election, however, there are important matters to take into account. First, any donations made to a 501(c)(3) that are used for lobbying are not tax-deductible for the donor, and non-profits must notify donors of this limitation.
Second, there will always be a strategic cost/benefit analysis for 501(c)(3) political lobbying. On the one hand, such lobbying may be in support of policy that directly benefits the mission of the organization, and involvement in larger issues may help energize stakeholders who care about such issues.
However, non-profits must also consider whether lobbying may alienate supporters who may think differently on specific policy issues, or many alienate supporters who think the non-profit should remain apolitical. The outcome of such analysis will vary widely depending upon context, but non-profits would do well to conduct such an analysis before engaging in any lobbying activity.
501(c)(4)’s and Political Activity
501(c)(4) tax-exempt social welfare organizations are non-profit corporations organized exclusively to promote social welfare. Social welfare organizations promote societal and policy changes for the purposes of societal betterment.
Examples of 501(c)(4) social welfare organizations include Greenpeace, the ACLU, The NAACP, and the National Organization for Women. 501(c)(4) non-profits have much more leeway to engage in political activity than 501(c)(3) corporations. Like 501(c)(3)’s, 501(c)(4)’s can engage in non-partisan political activities without penalty.
However, unlike 501(c)(3)’s, 501(c)(4)’s can engage in an unlimited amount of advocacy and lobbying regarding political issues or specific legislation, as long as such lobbying is related to its specific tax-exempt purpose. But note that if such non-profits do lobby, they are then ineligible for federal grants.
Moreover, 501(c)(4)’s can also engage directly in a specific candidate’s electoral campaign, including campaign donations, as long as such activity is consistent with its tax-exempt purpose, and is not its primary activity.
The primary activity test is again a contextual subjective text, but in general, 501(c)(4)’s should not spend more than 49 percent of their budget on political campaigns and, to minimize legal risk, they should spend less than that. However, any funds spent on campaigning by 501(c)(4)’s may be subject to federal taxation.
The biggest disadvantage of a 501(c)(4) is that donations are generally not deductible by the donor, except when the non-profit is a governmental entity, volunteer fire company, or veterans organization.
The portion of membership dues used by a 501(c)(4) for political campaign expenditures are also not tax-deductible. Such non-profits must notify their donors and dues paying members of the deductibility status of the funds they allocate to the organization.
The non-profit sector is an essential segment of society that provides important services to those in need and advocates for a more just and equitable world. There is a definite and important role for non-profit corporations within the political landscape. However, it is vital that non-profits have a firm understanding of IRS regulations before engaging in partisan political activities, lobbying, or campaigning.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, PC. To contact Ellis, call 602-456-0071 or email us at [email protected]