The Lobbying Rules Nonprofits Get Wrong — and the Power They're Leaving on the Table

During the last few months, I have participated in the Alliance for Justice’s Advocacy Check-up Clinic (a self assessment version is available here).  Two themes have emerged in these conversations with nonprofits:  first, organizations are silencing themselves on legislation and matters of community import based on a misunderstanding of the law and fear that “lobbying” will cost them their tax exempt status; and second, paradoxically, those that do engage in advocacy have not taken important precautions to ensure they can advocate to the greatest extent permitted by law.  These issues are related, and entities organized around serving society’s needs inherently must advocate for issues related to those needs.  Knowing the rules can empower nonprofit leaders to ensure the greatest impact on their mission by fearlessly advocating for the issues that matter to their communities.

What is Lobbying?

As a threshold matter, it is imperative to know what lobbying actually is – and is not.  The law includes in the definition of lobbying attempts to influence legislation through (1) direct contacts with legislators or others involved in the legislative process or by (2) encouraging the public to do the same (aka “grassroots lobbying”).  Things like public education, nonpartisan research, issue advocacy that does not reference a specific bill, or testimony requested by a legislative body, are by definition not considered lobbying activities—there is no limit to an organization’s engagement in these activities.  Electioneering means participating in political campaigns on behalf of, or in opposition to, any candidate.  Organizations exempt under section 501(c)(3) are strictly prohibited from electioneering.  Knowing these definitions is the first step to empowerment.

The Two Lobbying Tests for Nonprofits

For 501(c)(3) organizations that are engaging in lobbying activities, the next step is to understand the “insubstantial part test” and the “501(h) expenditure limit test”. The insubstantial part test is the default rule for all 501(c)(3) charities.  Insubstantial can mean around 3–5% of all the organization’s activities (an unhelpfully imprecise amount), and it includes all paid and unpaid activities (meaning a volunteer’s time counts).  This test also has a broad definition of lobbying to include any activity seeking to influence legislation.  This means there is a lot to track, and it is difficult to pin down with precision what counts and how close your organization is to the threshold.

The law alternatively permits 501(c)(3) organizations to make a one-time election to have the IRS apply the 501(h) expenditure limit test.  This test imposes a dollar-based limit (up to 20% of the first $500,000 in exempt purpose expenditures), and only spending counts (not volunteer time). The definitions of lobbying are also narrowed to include only direct and grassroots lobbying. These clear limits on lobbying expenditures based on the organization’s size mean more predictable compliance.

How are 501(c)(4)s Different than (c)(3)s for Lobbying Purposes?

As you may recall from an earlier edition of this newsletter, a 501(c)(4) is a social welfare organization.  They may engage in unlimited lobbying and even some political activities, provided however that the political campaign activities are not their primary activity. They are also closely scrutinized to ensure that their operations do not disproportionately benefit political parties, candidates, or private interests. These activities could endanger their tax-exempt status. Recall that contributions to a 501(c)(4) are not deductible as charitable contributions, and the organizations have less stringent reporting requirements than (c)(3) organizations.

Can 501(c)(3) and 501(c)(4) Organizations Work Together?

Federal law allows 501(c)(3) and 501(c)(4) organizations to affiliate and coordinate to a surprising extent, but they must maintain strict guardrails to preserve their distinct tax-exempt statuses. 501(c)(3) organizations cannot subsidize 501(c)(4) activities and must pay fair market value for shared resources. This means they can share personnel, facilities, and resources, provided that there is a proper allocation of cost maintained and documented.  The affiliates may communicate, but they cannot coordinate on campaign activities or substantial lobbying to a degree prohibited for the (c)(3). Finally, some essential guardrails must be put in place: separate legal entities, fair resource allocation, avoiding excess benefit transactions, and preventing any political activity cross-contamination.

How Can a Nonprofit Protect Itself When Engaging in Advocacy?

First, organizations must have a robust tracking system in place for expenditures (staff time, direct costs, overhead, etc.) and a policy governing how lobbying activity is identified and recorded. This information must be reported to the IRS in Form 990 every year.  Sloppy records raise concerns.  Second, we almost always advise that organizations take the 501(h) election, but it is worth discussing the particulars of your organization with an attorney.  If it seems that your organization is engaging in increasing amounts of advocacy, then a structural conversation about a possible 501(c)(4) affiliation is the next logical step.

There is a legitimate reason that nonprofits have limits on their lobbying: tax-exempt dollars should not become unchecked political instruments. But these rules have been carefully calibrated to promote robust civic engagement, not silence it. When an organization internalizes a prohibition stricter than the law imposes, they do not just limit themselves, they diminish the sector’s collective voice on the issues that brought them into existence. So, understand these rules, but read them not with the lens of prohibition, but one of permission and encouragement—your mission is societal, and the best societies are engaged and advocated for.

This article is for general informational purposes only and does not constitute legal advice. Reading this article does not create an attorney-client relationship. For advice specific to your organization's situation, contact Commonlight Legal LLP.