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Overview
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The 501(h) election allows 501(c)(3) organizations to determine their allowable lobbying expenditure amounts using the “501(h) expenditure” test rather than the “insubstantial part test.” The primary benefit of the 501(h) expenditure test is that it provides clear rules on the amount of allowable lobbying expenditures.
Election Application
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The 501(h) expenditure test provides a ceiling on the amount a charitable organization can spend annually on lobbying. In order to calculate the applicable amount, the charitable organization needs three pieces of information: (1) the charity’s exempt purpose expenditures; (2) its lobbying expenditures; and (3) its grassroots lobbying expenditures.
1. Exempt purposes expenditures: The total amount paid by the charity to accomplish its exempt purpose. This figure would include its lobbying expenditures as well.
2. Lobbying (communication) expenditures: Any expenditure made for the purpose to influence any legislation. In order to constitute a lobbying expenditure, the communication must refer to specific legislation and reflect a view on the legislation.
3. Grassroots lobbying (communication) expenditures: Any expenditure made for the purpose to influence any legislation through an attempt to affect the opinions of the general public. In order to constitute a grassroots lobbying expenditure, the communication must refer to specific legislation, must reflect a view on such legislation and encourage the recipient of the communication to take action with respect to such legislation. Grassroots lobbying expenditures are a subset of lobbying expenditures.
The overall limitation on lobbying expenditures starts at 20% of an organization’s exempt purposes expenditures. The allowable percentage gradually decreases as the organization’s expenditures increases with a maximum cap of $1,000,000 on an organization’s annual lobbying expenditures. In addition to the overall limitation, an organization’s grassroots lobbying expenditures are capped at 25 percent of the overall lobbying limit.
Sample Calculations
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The above presentations illustrate the various expenditures limitations under the 501(h) election.
Penalties
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There are two potential penalties associated with the 501(h) election. If an organization exceeds the total lobbying cap or the grassroots cap, then it has made an excess expenditure and must pay a tax equal to 25% of the excess amount. If the organization exceeds both the lobbying cap and the grassroots cap, it does not have to pay a penalty for going over both caps. It just has to pay a penalty on which ever one is higher.
The second penalty, which is a loss of the organization’s tax-exempt status, applies if an organization “normally” makes excessive lobbying expenditures. This is a test based on the charity’s current year lobbying expenditures and its lobbying expenditures for the prior three years.
Mechanics of the Election
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A charitable organization makes the election by filing Form 5768 with the Internal Revenue Service. The election applies retroactively to first day of the tax year the form is filed and all subsequent years.
Recordkeeping
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Charities generally must report their lobbying to the IRS every year either on Form 990 or Form 990-EZ. The information provided on these forms helps the IRS determine the organization’s lobbying activity does exceed the allowable limit. Charitable organizations choosing to lobby must retain accurate records of their lobbying activity or they may find themselves subject to harsh penalties. Accurate recordkeeping will help an organization stay within its lobbying limits and will deter the organization from going over those limits.
Calculator Guide
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Purpose of the Calculator
• Determine whether your organization has made excess lobbying expenditures for the year
• Determine whether your organization is at risk of losing its tax exemption due to excessive lobbying expenditures
• Calculate the allowable amount of lobbying expenditures for budgeting purposes
• Monitor lobbying expenses throughout the year to ensure expenditures stay within allowable limits
• Prepare a mock Form 990, Schedule C, Part II-A to help aid in preparation of your organization’s Form 990 filing obligation.
What You Will Need
In order to calculate the amount of allowable lobbying expenditures under the expenditure test, you will need the following information:
• Your organization’s direct lobbying expenditures - Direct lobbying expenditures are expenditures made for the purpose to influence any legislation through communication with any member or employee of a legislative body or with a government official or employee who may participate in the formulation of the legislation. In order to constitute a lobbying expenditure, the communication must refer to specific legislation and express a view on such legislation.
• Your organization’s grass roots lobbying expenditures – Grass roots lobbying expenditures are expenditures made for the purpose to influence any legislation through an attempt to affect the opinions of the general public. Similar to direct lobbying expenditures, in order to constitute a grassroots lobbying expenditure, the communication must refer to specific legislation, reflect a view on such legislation, and encourage the recipient of the communication to take action with respect to such legislation.
• Your organization’s other exempt purpose expenditures – Other exempt purpose expenditures are your organization’s total expenditures made to carry out its exempt purpose (other than lobbying expenditures).
• Your organization’s Form 990 for the prior three years - In order to run the “normally makes” test, you will need you organization’s Form 990 for the prior three years. The calculation requires numbers from Schedule C, Part II-A.
Step-by-step
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1. Input the id of your charitable organization
2. Input the year for which you want to run the calculation
3. Input your organization’s other exempt purpose expenditures
4. Input your organization’s direct lobbying expenses
5. Input your organization’s grassroots lobbying expenses
6. For question 5, you will need to refer to Part II-A of Schedule C of your organization’s Form 990. Input the applicable line for the given year as provided.
Output
With your organization’s lobbying expenditures inputted, the program will calculate your organization’s lobbying expenditure limits. Under the “Expenditure Test” section, the program calculates whether your organization has made excess lobbying expenditures for the year and, if so, the tax on the excess expenditures. Under the “Normally Makes Test” section, the program calculates whether your organization is deemed to normally make lobbying expenditures or grassroots expenditures in excess of its ceiling amount. Under the “Form 990” tab, the program creates a mock Form 990, Schedule C, Part II-A which can help aid your organization in its Form 990 preparation.