In the wake of President Donald Trump’s executive order on immigration, many nonprofit organizations - namely, universities, museums, and hospitals - have been wondering how to respond and if it is even appropriate to respond. This uncertainty stems in part from the perception that charitable organizations should not engage in discussion or take a position on public policy for fear of losing their tax-exempt status. But this perception is a misreading of the law.
Charitable organizations are allowed to engage in legislative advocacy or lobbying, as long as those efforts are not a “substantial” part of their overall function. Charitable organizations are not allowed to intervene in political campaigning on behalf or against a particular candidate. The origin of these limitations are found in Section 501(c)(3) of the Internal Revenue Code, which sets forth two important criteria for organizations seeking to qualify as a charitable organization: an absolute ban on political campaign activity and a limit on legislative advocacy.
Ban on Political Campaign Activity
One of the criteria for qualification as a tax-exempt charitable organization is that it must “not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.” This ban is seen as absolute, and depending on the level of the infraction, the IRS has the discretion to either impose a tax on incidental political expenditures or revoke the tax-exempt status of a nonprofit that violates the political campaigning prohibition.
There are four elements to the ban on political campaigning and all must be present in order for the ban to be operative:
- A charitable organization may not “participate or intervene” in a political campaign.
- The political activity involved must constitute a “political campaign.”
- The campaign must be with respect to an individual who is a “candidate.”
- The individual must be a candidate for “public office.”
Based on the above criteria, official communication by nonprofits pertaining to President Trump’s executive order would not run afoul of the outright ban on political campaigning. Since the election is over, and any potential nonprofit speech would focus on the president’s executive order, and not campaign activity, the absolute ban on political campaigning would not apply.
Limitation on Lobbying or Influencing Legislation
Charitable organizations must also be mindful of a second prerequisite to maintaining their tax-exempt status. No “substantial part” of their activities may comprise “carrying on propaganda, or otherwise attempting, to influence legislation.” There are two tests for determining what constitutes a “substantial part” of an organization’s overall function:
- The “Substantial Part” Test
The substantial part test is the default test for most organizations. It involves a fact-based analysis by the IRS to determine whether the organization has engaged in “more than a substantial part of its activities in influencing legislation. While the term “substantial” has never been quantified, some practitioners have suggested that “insubstantial” means less than 5 percent of an organization’s activity.
Another option for charitable organizations is to make a 501(h) election, which would allow the nonprofit to elect into an objective “expenditure test” which would provide an alternative method for measuring legislative activity. Choosing to make a 501(h) election would not affect an organization’s 501(c)(3) status. Rather, it would set clear parameters for the organization to engage in legislative influencing activities without risking its status as a nonprofit.
Making a 501(h) election involves filing Form 5768 with the IRS that allows the organization to spend money on legislative activities within certain limits. The limits would be set by the amount that an organization currently spends to further its tax-exempt purpose. The 501(h) election also enables an organization to choose to measure its activities by using two different criteria: grass roots advocacy and traditional legislative lobbying. The limits on each kind of activity are determined by the category is used to define the activity. If the charitable organization goes over the limit defined by their 501(h) election, they may be subject to an excise tax on the excess expenditure.