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NonProfit102-1

Image: Prixel Creative

Last month, part one of this article discussed the compensation and revenue related restrictions on nonprofits, and how that relates to the overall purpose of nonprofit organizations. This month, part two will discuss two additional regulations every nonprofit must comply with.

A nonprofit is an organization created to serve and benefit the public. It is not uncommon for a nonprofit to attempt to benefit the public by conducting activities that might fall into the realm of politics or lobbying. It is very important for your nonprofit to keep in mind that there are very strict regulations and penalties for nonprofits engaging in these types of activities. Before your nonprofit engages in any activities related to politics or legislation, the following regulations should be considered.

Political Participation Prohibition
Nonprofit organizations are strictly prohibited from directly or indirectly participating in the political campaign of any individual running for publicly elected office. This prohibition ranges from presidential campaigns to school board or city supervisor elections. Violating this prohibition can result in losing tax-exempt status and also imposing of excise taxes. The most common types of actions that become problematic are donations to campaigns, or public support for or criticism of a particular candidate.

An organization is allowed to participate in activities like voter registration campaigns and voter education campaigns. However, these activities must be done in a non-partisan manner, and cannot be done in a way that could favor a particular candidate. In determining whether an organization’s actions constitute a prohibited political activity, the IRS conducts a “facts and circumstances” test. This test consists of weighing the actions in question with the regular activities of the organization. Additionally, the IRS considers the political climate at the time of the actions in question. Thus, inviting a political figure to speak at an event sponsored by the nonprofit could be a violation if done during the height of a campaign season, and not be a violation if done during a year with no elections.

Before a nonprofit deals with any political figure, or gets involved with voter education or registration, careful consideration should be given to the current political climate, and to any possible appearance of support for a political figure.

Limits on Lobbying
The IRS does not allow an organization to be tax-exempt if a substantial part of its activities constitutes lobbying. Lobbying is an attempt to influence the legislative acts of Congress, or any similar state or local body, or to influence public referendums, initiatives, etc. While a nonprofit may participate in a certain amount of lobbying, it must only be done to a degree deemed acceptable by the IRS.

The IRS uses the “substantial part” test to determine whether or not a nonprofit’s lobbying is acceptable. The “substantial part” is a term with no clear definition and depends largely on the surrounding facts and circumstances. Factors considered by the IRS are:

  • The amount of time, money and workforce devoted to lobbying
  • The amount of promotion done for the lobbying effort
  • The frequency with which the lobbying activity is engaged in
  • The influence of the nonprofit’s lobbying efforts

There are no clearly defined parameters for these factors. Some courts have used 16%-20% of a nonprofit’s total expenditures as a general line of demarcation for determining whether lobbying is substantial. However, this is not an official rule, and the IRS could find lobbying to be substantial with a much smaller percentage of total expenditures. As a general rule of thumb, a number of nonprofits aim to have less than 5% of the organizations total expenditures and workforce devoted to lobbying efforts.

The penalties for surpassing the limits on lobbying can result in losing tax-exempt status. Given the uncertain nature of the rule, it is important for a nonprofit to be very careful when engaging in lobbying, and should ensure that the vast majority of time, money, and workforce serve the charitable purpose of the organization rather than influencing legislation.

What Does All This Mean For Your Organization?
When creating and managing your nonprofit the most important point to keep in mind is the charitable purpose of the organization. A nonprofit is created to benefit the public in the manner articulated in your purpose. Before engaging in any form of political, lobbying, or voter education/registration activity, you should carefully weigh whether or not the activity is consistent with your charitable purpose. Furthermore, you should consider whether the activity creates any sense that your organization is supporting or criticizing a political candidate. If there is any doubt, be sure to consult with an attorney to prevent a problem with the IRS.

Part one of this article outlined the regulations on compensation, private benefit, and unrelated business income tax. Those regulations are designed to ensure the money from the nonprofit is not used to benefit any private individual, and to ensure that the nonprofit is not generating tax-exempt revenue from activities unrelated to the charitable purpose. Part two discussed the restrictions on political and lobbying activities. Ultimately, all these regulations revolve around conducting activities within the scope of your nonprofit’s defined charitable purpose, and ensuring the nonprofit’s time and money is devoted to benefiting the public. When creating and maintaining a nonprofit, all decisions should be made with those points in mind.

Disclaimer: The information in this article is presented for informational purposes only, and should not be taken as legal advice. Before acting on any information presented in this article, you should consult an attorney regarding the facts of your specific situation. We would love to hear from you, so please feel free to contact Wilkinson Mazzeo for a consultation.

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