Why Non-Profits May Not Want to Talk Politics

U.S. Capitol Building

With election season lurking around the corner, the exemption status for non-profits all over the country may be at risk, and most of them don’t even know it.

As I discussed earlier in “Demystifying Private Inurement”, the primary statue governing what constitutes a charitable organization is chock full of requirements. But it also has some pretty important limitations as well, one of them being the prohibition on political activity and limitations on lobbying. I think most non-profiteers are aware that there some type of limits to the political activity their organizations may engage in. But, I don’t think many are aware of just how much the IRS has found constitutes “political activity” and just how little lobbying constitutes as too much.

Under 501(3)(c), charitable organizations are prohibited from participating in ANY political campaigns for or against ANY candidate for office. Along these same lines, charitable organizations may act to influence legislation, but only to, “an insubstantial degree.”

What does “influence” and “insubstantial degree” mean? Glad you asked. Non-profits “influence” legislation when communicating with legislative officers (like a Congressman) or attempting to sway an individuals opinion as to a particular candidate.  And what is considered an insubstantial degree?  Brace yourself……it depends. But the Tax Court has found that organizations dedicating just 5% of its time, effort or monies to lobbying are influencing legislation in more than an insubstantial degree.  Why is this important? Failure to adhere to these restrictions leaves organizations at risk of having a bunch of taxes being waged against them.  Or even worse, having its exemption status totally revoked.  In the end, the key take-away is to remember that charitable organizations may not interfere with political campaigns at all.  As to lobbying, organizations may influence legislation no more than to an insubstantial degree.

Also, let’s be clear.  The limitations do not apply to everything politically oriented. For example, my local  Non-profit Council has been participating in hearings that our state Senate has been putting on concerning legislation that will affect local non-profits. This is permissible.  However, if you decide to hold a seminar on all the reasons why a particular political party sucks this will likely be held to be political activity.  Voter education is tricky thought, as there have been instances where programs have been held not to be a political activity.  However, this is usually determined on a case by case basis and its usually best to request IRS Letter Rulings.

As if this all isn’t confusing enough, I’ll briefly note that organizations may also opt out of the “more than insubstantial activity” test and be governed by an “influencing expenditures limit” test  by filing a Form 5768 “Election/Revocation of Election by a 501(c)(3) to Make Expenditures to Influence Legislation.” A much broader test, this election makes it much harder for an organization to lose its exemption status but I’ll talk a little more about this in the next post.

What I really want to impress upon those involved with non-profits is that it isn’t as simple as refraining from political talk in the day time and then rallying at night.  In the world of tax-exemption it isn’t what you think you’re doing that matters, but what the powers that be (i.e. the IRS) think you’re doing that does.  The higher up you are in an organization, the harder it is for the powers that be to differentiate between the actions of Joe Schmo the person and Joe Schmo the Director. Always keep that in mind when endorsing someone or that snazzy little button Candidate A gave you could end up costing everyone years of work.

As usual, keep in mind there is SO much more to this than a few paragraphs can cover. But if you’re interested, the IRS has provided 21 factual scenarios to clarify the issue, all of which can be found here.

Also remember, these rules only apply to 501(c)(3) charitable organizations. Different rules apply for political organizations, churches, social welfare groups, etc., an explanation of which can be found here.