In March 2020, we introduced the topic of charities’ involvement in political activities in this article. We are currently in a presidential election year and organizations have become increasingly vocal regarding politics over the last several months. As a leader of a charitable organization, you may feel that your organization’s mission aligns directly or indirectly with many of the political issues being publicly debated today. You may be wondering how your organization can get involved in political activities without incurring any penalties or placing your organization’s tax-exempt status in jeopardy and what activities you should avoid at all costs.
As with our March article, this article will focus on charities, defined as organizations exempt from income tax under Code Section 501(c)(3), as the vast majority of tax-exempt organizations are exempt under this section. There are a number of other types of not-for-profit organizations, such as 501(c)(4) social welfare organizations, 501(c)(6) business leagues, and 501(c)(7) social clubs, that are subject to completely different rules regarding political activity.
Previously, we identified that charities are absolutely prohibited from intervening directly or indirectly with a political campaign on behalf of any candidate. They must be bipartisan in their actions and in their messages. How exactly might a charity intervene with a political campaign? Certain campaign activities might be obvious and fairly easy for your organization to avoid, such as making direct contributions to campaigns, making public endorsements, as well as education campaigns that have evidence of favoring one candidate. However, some may be less obvious. In particular, the personal activities of employees or volunteers may implicate the organization and are more difficult to control. While it’s clear that individuals have a personal right to express their political opinions publicly, employees and volunteers should make clear that their activities are not representative of the charity. Some seemingly innocuous examples that might be construed as prohibited campaign activity would be an organization leader attending a candidate’s rally, canvassing for signatures while wearing apparel with your organization’s logo, or posting an endorsement on a social media platform while identifying as an employee of the organization. Your organization should also take care when sharing others’ content on social media; review it for embedded endorsements of candidates prior to sharing.
Some of you may be asking: what happens if you discover that your charity might have inadvertently participated in some prohibited activities? If your charity were to engage in these activities, your organization would be required to take corrective action by recovering funds to the extent possible, establishing safeguards to prevent future activity, as well as paying penalties (otherwise known as excise taxes) both from the organization and its leaders personally. In particularly egregious cases, your organization’s tax-exempt status could be revoked. Prohibited expenditures need not be in the form of a direct payment; staff compensation or costs of facilities used for campaign activities should be considered as well. It should also be noted that campaign activities are prohibited even if there is no expenditure involved.
At this point, you may be wondering “what CAN my organization do?” Well, as illustrated in our previous article, charities may lobby, or attempt to influence legislation, freely as long as the lobbying activities do not constitute a substantial part of the organization’s overall activities. Actions such as contacting or urging the public to contact members or employees of a legislative body for the purpose of proposing, supporting, or opposing legislation, or advocating for the adoption of or rejection of legislation, are examples of lobbying. Common lobbying expenditures include staff compensation for time spent meeting with legislators, paying dues to an industry association (of which the association identifies a portion as lobbying costs), or even renting a billboard or hiring a lobbyist. As with campaigning, lobbying activities need not necessarily be an expenditure to be factored into the substantial part analysis; overall effort, including volunteer activities, should be considered.
What, then, constitutes a substantial part of the organization’s activities? Unfortunately, there is very little guidance to help draw this line, outside of a 1955 federal appeals court decision (I) which opined that approximately five percent of an organization’s time and effort was an insubstantial part of its overall activities. Still, five percent is generally more than most charities intend to devote to lobbying activities, meaning it’s likely that most planned lobbying activities will be permissible with no threat to your organization’s exempt status.
If your organization wishes to have a more objective way to measure whether its lobbying activities are substantial, it can elect under Code Section 501(h) to subject itself to an expenditures test instead. The expenditures test is sometimes preferable, especially if the organization regularly, as opposed to occasionally, engages in lobbying activities, as it provides charities with a clear and objective dollar threshold for permissible lobbying expenditures. However, it requires additional annual reporting, even if no lobbying expenditures were incurred.
Should excessive lobbying under either the substantial part test or the expenditures test occur, your organization would have to take corrective action by recovering funds to the extent possible, establishing safeguards to prevent future excessive lobbying, and paying penalties from the organization and its leaders personally. As with campaigning, in particularly egregious cases, your organization’s tax-exempt status could be revoked. Note that lobbying does not include attempting to influence actions by executive, judicial, or administrative bodies, nor does it include educational campaigns without advocating a position. Costs involved in these activities are general expenditures of your organization’s operations that should be evaluated for reporting as either a program service cost or an administrative cost.
As we stated previously, advocacy is, and remains, a key component of many charities’ missions. If not well thought out in advance, wading into the waters of political activity can be dangerous for a charity. However, with planning, it can be a valuable, if not necessary, element of your program service activities. Our team of tax-exempt experts at Bonadio is available to help you plan and report your political activities to ensure that your tax-exempt status is protected while helping you to further your mission.
(I) Citation: Seasongood v. Commissioner, 227 F.2d 907 (6th Cir. 1955)
The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We, therefore, make no warranties, expressed or implied, on the services provided hereunder.