Protecting the Tax-Exempt Status of 501(c) (6) and 501(c)(3) Nonprofit Organizations
Many nonprofit organizations watched with great interest as this election season played out, and some may choose in the future to take a more active role in the political process. Some will also become involved with legislation. It is important for nonprofits to remember that engaging in certain political activities could impact their tax-exempt status.
The specific political activities a nonprofit is allowed to engage in depend upon the type of the nonprofit entity. Internal Revenue Code Section 501(c) identifies 29 types of entities that are eligible for nonprofit status. Nonprofits should be particularly aware of the rules that apply to their specific type of nonprofit. In particular, the rules governing political activity differ significantly between the two more common types of nonprofits interacting with the damage prevention industry, 501(c)(3) charitable organizations and 501(c) (6) business leagues.
One key difference between 501(c)(3) and 501(c)(6) nonprofits involves the limitation placed on lobbying. Lobbying occurs when a nonprofit contacts members of a legislative body for the purpose of proposing, supporting, or opposing legislation; urges the public to contact members of a legislative body to do the same; advocates for the adoption or rejection of legislation; or communicates with the general public and reflects a view on a ballot initiative. As a default rule, 501(c)(3) nonprofits may engage in lobbying so long as such activities are not substantial in relation to their overall activities. Alternatively, a 501(c)(3) can elect to measure its lobbying activities under an “expenditure test” whereby the nonprofit is given a limit on its lobbying expenditures based on the nonprofit’s annual expenditures. These rules do not apply to a 501(c)(6) nonprofit, which may engage in unlimited lobbying in furtherance of their exempt purposes.
Political Campaign Intervention
The IRS places greater restriction on a nonprofit’s ability to engage in political campaign intervention. Political campaign intervention includes activities that favor or oppose one or more political candidates, including endorsements, contributions to political campaign funds and public statements in favor of or in opposition to a candidate. 501(c)(3) nonprofits are prohibited from engaging in political campaign intervention. In contrast, a 501(c)(6) nonprofit may engage in political campaign intervention provided that such intervention does not constitute the organization’s primary activity.
A 501(c)(6) nonprofit that chooses to engage in certain political activities must provide notice of the amounts of membership dues allocable to these political expenditures. This includes expenditures paid or incurred in connection with influencing legislation; participating or intervening in any political campaign on behalf of any candidate for public office; attempting to influence the general public with respect to elections, legislative matters, or referendums; and any direct communication with an executive branch official in an attempt to influence the official’s actions or positions. If the nonprofit fails to provide the required notice, the nonprofit must pay a tax on these expenditures. This notice and tax requirement does not apply to a 501(c)(3) nonprofit.
Voter Education and Registration
Low-risk political activities that a nonprofit may engage in include voter education and registration programs. Both 501(c)(3) and (c)(6) nonprofits are permitted to carry out voter education and registration activities, so long as these activities are carried out in a non-partisan manner. This may include holding public forums or the publishing of voter education guides. If a 501(c)(3) nonprofit engages in these activities, the nonprofit should be certain that its content is broad, neutral, and inclusive, as to avoid the appearance of engaging in political campaign activity.
Nonprofits should be mindful of IRS rules governing their organization’s ability to engage in political activities and the risk that noncompliance presents to their tax-exempt status. In addition to these rules, nonprofits should also be aware that state tax regulations and campaign finance laws may further limit their ability to engage in political activity.
Alexander Smith is a corporate law associate with Hinshaw & Culbertson LLP. John W. Dubbs III is a corporate and tax law partner with Hinshaw & Culbertson LLP, with substantial experience in matters related to nonprofit taxation.
THIS ARTICLE IS INTENDED ONLY FOR THE GENERAL INFORMATION OF THE READER. ANY NONPROFIT ORGANIZATION WITH A SPECIFIC ISSUE IS ENCOURAGED TO DISCUSS WITH THEIR COUNSEL OR OTHER TAX ADVISOR.