A Brief Recap of the Rules Governing Nonprofit Participation in Political Campaign and Lobbying Activities Ahead of the 2022 Midterm Elections

• October 26, 2022

• Scott Frissell , Krieg DeVault LLP

Following the Supreme Court’s decision to overturn Roe v. Wade earlier this year, over $124 million has been spent on abortion-related political advertising,[1] and it is estimated that nearly $9.7 billion will be spent on political advertising during the 2022 election cycle.[2] With the 2022 midterm elections fast approaching, many nonprofit health care organizations may be considering joining in such election-related activities. As a result, it is critical for leaders of these nonprofit organizations to refresh their understanding of the rules governing nonprofit participation in political campaign and lobbying activities, as noncompliance can lead to costly excise taxes and jeopardize the organization’s tax-exempt status.

Political campaign activities and legislative activities are two separate issues for nonprofit health care organizations with two distinct sets of rules and consequences. The rules applied in a given situation depend on several issues, including the type of tax-exempt organization, the kind of activity, and the scope or amount of the activity conducted. The following is a brief recap of the political and lobbying rules for “charitable organizations” exempt under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (Code), “social welfare organizations” exempt under Section 501(c)(4) of the Code, and “business leagues” exempt under Section 501(c)(6) of the Code.

Political Campaign Activities of Nonprofit Organizations

Political campaign intervention includes any activities that favor or oppose one or more candidates for public office.[3] Such activities include, but are not limited to, direct or indirect contributions to political campaign funds, public statements of support or opposition made by or on behalf of an organization (whether written or verbal), and the distribution of materials prepared by others that support or oppose any candidate for public office.

Political Campaign Activities of Charitable Organizations

Charitable organizations are prohibited from directly or indirectly participating or intervening in any political campaign on behalf of, or in opposition to, any candidate for political office (including publishing or distributing statements).[4] This prohibition applies to any political campaign on behalf of or in opposition to any candidate for local, state, or federal public office.[5] Charitable organizations may not circumvent this prohibition through subsidiary for-profit entities or by creating an affiliated political action committees (PAC) under Section 527 of the Code. The Internal Revenue Service (IRS) has previously ruled that a nonprofit health care system would be engaged in impermissible political campaign activities if its wholly owned for-profit subsidiary created and operated a PAC, and the nonprofit organization provided services and other resources to the for-profit subsidiary and PAC under a contractual agreement.[6]

While charitable organizations are not permitted to engage in political campaign activities, as described above, they are allowed to conduct certain voter education activities as long as they are done in a nonpartisan manner. For example, a charitable organization may set up a booth at a state fair to help register citizens to vote for an upcoming election. This registration activity would not be treated as political campaign intervention as long as the registration is performed in a nonpartisan manner.[7] In addition, the political campaign intervention prohibition is not intended to restrict free expression on political matters by leaders of charitable organizations speaking for themselves as individuals.[8] However, leaders of charitable organizations must make sure not to make partisan comments in their official capacity, in the charitable organization’s publications, or at official functions of the charitable organization.[9]

A charitable organization’s participation or intervention in a political campaign may result in the loss or denial of the organization’s tax-exempt status. In addition, the organization will be deemed to have made a “taxable expenditure” in the amount of the political expenditure and be subject to certain excise taxes, including a 10% tax on each political expenditure.[10] A 2.5% excise tax will also be imposed on any manager who agreed to make the political expenditure unless their agreement thereto was not willful and due to reasonable cause.[11] Further, if the impermissible political expenditure is not corrected, additional excise taxes of 100% and 50%, respectively, will be imposed on the organization and the manager who agreed to make the political expenditure.[12]

Political Campaign Activities of Social Welfare Organizations and Business Leagues

In contrast to how the Code treats charitable organizations, social welfare organizations and business leagues are permitted to engage in political campaign activities. Both of these tax-exempt organizations are allowed to support or oppose candidates, provided such activities are not the organization’s primary purpose.[13] Generally, it is believed that political campaign activities will not be deemed to be an organization’s primary purpose as long as no more than 40% of the organization’s expenses are spent on political activities.[14]

To the extent social welfare organizations and business leagues engage in political campaign activities, such activities may be subject to an excise tax under Section 527 of the Code. Such excise tax is assessed at the highest corporate tax rate (currently 21% for 2022) on the lesser of the tax-exempt organization’s net investment income,[15] or its expenditures for political campaign activities.[16] In addition, if the organization’s political campaign activities become its primary purpose, it may lose its tax-exempt status.

Lobbying Activities of Nonprofit Organizations

Lobbying is an attempt to influence legislation by propaganda or otherwise.[17] A tax-exempt organization attempts to influence legislation if it contacts, or urges the public to contact, members of a legislative body to propose or support legislation or if it advocates the adoption or rejection of legislation.[18] The term “legislation” includes any action by Congress, a state legislature, local counsel, or similar governing body, or by the public in a referendum, initiative, constitutional amendment, or similar procedure.[19]

A tax-exempt organization’s communications will not be considered a lobbying communication if the communication falls within one of the following exceptions: (i) nonpartisan analysis, study, or research, including making the results available to the general public; (ii) technical advice or assistance to a governmental body in response to a request by the governmental body; and (iii) communications pertaining to “self-defense” by the organization, such as appearing before, or communicating with, any legislative body with respect to a decision of that body that would adversely affect the organization.[20] Additionally, nonprofit advocacy will not automatically be considered a lobbying activity. That is, nonprofit organizations are permitted to engage in unlimited advocacy to the general public and legislatures on general topics of broad social, economic, or similar problems as long as those communications do not refer to specific legislation, ballot initiatives, or directly encourage recipients to act on particular legislation or initiatives.[21]

Lobbying Activities of Charitable Organizations

One of the criteria for qualification as a tax-exempt charitable organization is that no substantial part of the organization’s activities may constitute “carrying on propaganda, or otherwise attempting, to influence legislation.”[22] This rule applies regardless of whether the legislation advocated for or opposed would advance the organization’s charitable purposes.[23]

Substantial Part Test

A charitable organization that has not made a Section 501(h) expenditure election (described below) may not engage in “substantial” lobbying activities to influence legislation.[24] A determination of whether a charitable organization’s lobbying activities are substantial is determined based on all the pertinent facts and circumstances, and the IRS has not provided any “safe harbor” percentage of time or resources that may be expended.[25]

If a charitable organization does engage in substantial lobbying activities, it will be considered an “action organization” and will no longer qualify for an exemption under Section 501(c)(3) of the Code.[26] In addition, the charitable organization will be subject to an excise tax equal to 5% of the lobbying expenditures.[27] A 5% excise tax will also be imposed on any manager who agreed to make the lobbying expenditure knowing that such expenditure was improper, unless the manager’s agreement to the expenditure was not willful and was due to reasonable cause.[28]

Expenditures Test

Charitable organizations may also elect to have their lobbying activities tested under Section 501(h) of the Code instead of under the substantial part test. The permitted annual expenditures for legislative efforts under Section 501(h) of the Code is determined using a sliding scale percentage of the charitable organization’s exempt purpose expenditures. Section 4911(c)(2) of the Code provides that the permitted annual level of expenditures for legislative efforts (i.e., the “lobbying nontaxable amount”) is 20% of the first $500,000 of a charitable organization’s expenditures for an exempt purpose (including legislative, but not including fundraising activities), plus 15% of the next 500,000, 10% of the next $500,000, and 5% of any exempt purpose expenditure over $1,500,000. Therefore, the total amount spent for legislative activities in any year by a charitable organization that has elected the expenditure test may not exceed $1,000,000.[29] A separate limitation equal to 25% of the preceding amounts is also imposed on the charitable organization’s grass roots lobbying communications made in an attempt to influence the general public on legislative matters.[30]

Charitable organizations that exceed the preceding limitations are subject to an excise tax equal to 25% of the excess lobbying expenditures.[31] In addition, if the charitable organization’s lobbying expenditures normally (on an average over a four-year period) exceeds 150% of the preceding limitations, then the charitable organization will lose its tax-exempt status[32] and would not be eligible to convert to a social welfare organization under Section 501(c)(4) of the Code.[33]

Lobbying Activities of Social Welfare Organizations and Business Leagues

Social welfare organizations are not prohibited from influencing legislation as long as the organization is primarily engaged in efforts to promote social welfare.[34] That is, social welfare organizations can be “action” organizations, unlike charitable organizations. Likewise, there are no restrictions on business leagues.[35]

Conclusion

Given the severe implications of noncompliance, tax-exempt organizations engaging in political campaign and lobbying activities are encouraged to understand the impact such actions may have on their tax-exempt status, and the excise taxes that may be imposed on the organization. Tax-exempt organizations should also consider the federal and state campaign finance laws and how they may also impact their political and lobbying activities.

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