IRS Form 5768

Filing IRS Form 5768 shifts the burden of proof regarding excess lobbying expenses from the nonprofit to the IRS. Regrettably, less than 3% of 501 (c)(3) entities have done so, though all are qualified to do so.

How it works

Tax exempt 501(c)(3) nonprofit organizations are prohibited from lobbying “except to an insubstantial degree”. The IRS evaluates an organization’s lobbying activities under two rules:

• The general rule looks at the totality of an organization’s lobbying activities, whether by paid staff or volunteers, and considers whether those activities are “insubstantial.” This test gives the IRS fairly broad discretion; courts have in the past considered expenditures of more than 5% of the organization’s budget, time and effort to be “substantial.”

• The other more defined test is the 501(h) expenditure test, named after the bright line rule set forth in Section 501(h) of the Internal Revenue Code. This test sets specific dollar limits on a nonprofit’s lobbying activities. The 501(h) test not only sets clear limits, it also only includes lobbying expenditures (money and staff time) toward those limits; the work of volunteers is not counted against the limits, as it would be under the “insubstantial” test. In order to be governed by the 501(h) test, an organization must file a form electing to be evaluated under the rule (IRS Form 5768). The disclosures required under the 501(h) test are essentially the same as that required for the annual informational return (IRS Form 990).

In most cases, an organization will be able to engage in more lobbying activity, with greater confidence that it will not endanger its tax exempt status, if it elects to be governed by the 501(h) test. The 501(h) rule places an overall limit of $1 million on lobbying expenditures, however, so organizations with very large budgets may be able to do more lobbying under the old “insubstantiality” rule.