Understanding the Limits on Lobbying by GrantmakersPDF
Grantmaking organizations are vehicles for igniting positive change in our communities. Increasingly, grantmakers recognize the power of advocacy and lobbying in creating systemic and lasting change.
However, a grantmaking organization risks imposition of excises taxes and penalties and may jeopardize its tax exempt status if it fails to observe state and federal rules regarding whether—and to what extent—grantmakers may fund or directly engage in lobbying activities.
Issue advocacy and public education unlimited
Federal tax law materially limits lobbying by grantmaking organizations; however, grantmakers generally are permitted to fund and engage directly in issue advocacy and public education initiatives. Federal tax law defines "lobbying” as an attempt to influence specific legislation through direct or indirect communications with elected officials or government employees. Grantmakers generally are permitted to fund and engage directly in issue advocacy and public education initiatives, even if the focus may become the subject of legislation.
Private foundations generally are prohibited from lobbying, but may award general support grants to public charities that engage in lobbying activities
For all practical purposes, private foundations are prohibited from making grants earmarked for lobbying and directly engaging in lobbying activities. This is because any lobbying expenditures are subject to excise taxes under Internal Revenue Code Section 4945.
Lobbying expenditures are subject to an initial tax on the private foundation equal to 20% of the amounts spent on lobbying, as well as a tax on professional and volunteer management equal to 5% of the lobbying expenditures. Liability for the tax on management is joint and several.
The penalties increase significantly if the private foundation fails to correct the expenditure within the taxable period. An additional tax will be levied on the private foundation equal to 100% of the lobbying expenditures. Further, managers who fail to correct are taxed at the lesser of 50% of the expenditure or $20,000.
Private foundations may make grants to public charities that engage in lobbying activities, but those grants cannot be earmarked (in whole or in part) for lobbying. Permissible grants to such organizations may take one of two forms. First, a private foundation may make a general support grant to a public charity that engages in lobbying, leaving to the grantee discretion as to how the funds will be used. The recipient of the grant may then choose on its own to use the funds for lobbying expenditures, but must comply with federal lobbying rules for public charities. Second, private foundations may make specific project grants to projects that involve some lobbying component. However, the grant must be limited to the non-lobbying component of the project.
Public charities may engage in lobbying activities . . . within certain guidelines
Public charities, including community foundations, may directly fund and engage in limited lobbying activity. There are two tests available to determine to what extent public charities may lobby: (i) the "no substantial part” test, and (ii) the Internal Revenue Code Section 501(h) election.
"No substantial part” test
A grantmaker may qualify for public charity status only if "no substantial part” of that organization’s activities includes "carrying on propaganda, or otherwise attempting, to influence legislation.” Accordingly, a grantmaker may fund or directly engage in lobbying, provided that lobbying does not constitute a substantial part of its overall activities.
However, "substantial part” is not defined in the Internal Revenue Code but is determined by considering the time and expenditures an organization devotes to lobbying. There are no clear rules that can help an organization to determine whether it falls within the permissible standards.
For this reason, unless an organization is devoting very small amounts of money and time to lobbying, relying on the "no substantial part” test may not be worth the risk to the grantmaker. And the risk is significant—an organization that violates the "no substantial part” test may lose its tax exempt status and be assessed excises taxes equal to 5% of the excess lobbying expenditures. The organization’s managers also may be jointly and severally liable for an amount equal to 5% of the lobbying expenditures if they approved the expenditures with knowledge that it might result in a loss of the organization’s tax exempt status.
Section 501(h) election
Public charity grantmakers that are actively engaged in lobbying activity generally should take advantage of the Internal Revenue Code Section 501(h) election safe harbor.
Section 501(h) outlines an "expenditure test” that sets ceilings for two different types of lobbying: direct lobbying (influencing legislation by direct communication with elected officials or government employees) and indirect or grassroots lobbying (influencing legislation by mobilizing and encouraging the public to action).
These ceilings are tied to the amount of the organization’s annual exempt expenditures. A public charity may spend the following amounts on lobbying activities:
- 20% of the first $500,000 of its exempt purpose expenditures
- 15% of the second $500,000 of its exempt purpose expenditures (that is, $100,000 + 15% of exempt purpose expenditures over $500,000)
- 10% of the third $500,000 of its exempt purpose expenditures (that is, $175,000 + 10% of exempt purpose expenditures over $1,000,000)
- 5% of any remaining exempt purpose expenditures (that is, $225,000 + 5% of all exempt purpose expenditures above $1,500,000)
Overall spending on lobbying may not exceed $1,000,000. A sublimit of 25% applies to indirect or grassroots lobbying.
To make the Section 501(h) election, the organization must file an IRS Form 5768, "Election/Revocation of Election by an Eligible IRC Section 501(c)(3) Organization to Make Expenditures to Influence Legislation.”
As discussed above, private foundations are for all practical purposes prohibited from lobbying. Accordingly, the Section 501(h) election is available only to public charities.
Because public charities are permitted to engage in lobbying activity, community foundations may award grants that are earmarked for lobbying. The amount of any such grants must fall within the community foundation’s permitted limits—that is, the grants will be included in the calculation of permitted expenditures under Section 501(h) or the "no substantial part” test, depending on which measurement the community foundation has chosen.
Political campaigning prohibited
Private foundations and public charities are prohibited from engaging in any political campaign activity—i.e., such organizations may not intervene on behalf of or against a candidate for public office. Private foundations may not carry on voter registration drives or earmark grants to nonprofits for such drives; however, public charities may fund or directly undertake voter registration drives under certain circumstances.
Registration and reporting requirements
If an organization makes a section 501(h) election, or otherwise engages in substantial lobbying activities, it must comply with federal and state laws that, among other things, set specific restrictions on lobbyist conduct, require lobbyists to register, and require regular reporting of expenditures and activities. All grantmakers engaged, directly or indirectly, in lobbying must take care to ensure compliance with these laws and regulations.