We will elect a new president in 2016, many congressional seats will turn over and countless changes in representation will spring from voting booths across the country. An election year is a prime opportunity for tax-exempt organizations to advance their causes and advocate for their issues, but they must do so with an understanding of tax law constraints on their political activity.
In many races, special interest groups have entered the fray, investing in promotion of their candidates and encouraging others to do the same. These groups will happily welcome the help of tax-exempt organizations to further their goals. This is all well and good as long as tax-exempt organizations understand how fine the lines are around “electioneering,” so they can decide whether or to what extent they will participate.
Know the meaning of “political activity”
Generally, a nonprofit organization is deemed to have impermissible political activity when it directly or indirectly induces others to vote for specific candidates for public office. While sometimes what is permissible is clear, sometimes it is complicated. What should your organization do when a candidate asks to speak at your next meeting, or when the chairperson of your board endorses a candidate in an interview with the local newspaper? Not knowing the rules can land an organization on the hot seat.
Learn more about tax requirements
With the political scene gathering attention and momentum, we’ll review federal tax requirements for lobbying and political activities, explain IRS definitions and address implications of PACs. Register to replayEvery tax-exempt organization must fully understand the extent to which it is allowed to participate in political activity based on its specific tax-exempt status:
Section 501(c)(3) organizations: Charitable organizations exempt under IRC 501(c)(3) are prohibited from participating in any political activity whatsoever. In matters of public policy, the law forbids charitable organizations from taking sides in an election, because their focus must be on the charitable class it serves. Further, contributions to political campaigns are not tax-deductible to donors, but if Section 501(c)(3) organizations spend money on politicking, donors receive an unlawful tax deduction. A Section 501(c)(3) organization can lose its tax-exempt status if it engages in any political activity, but that outcome is rare. More threatening is the potential loss of federal or state funding. In many funding agencies’ grant contracts, provisions state that funds cannot be used for political purposes, and if a violation is found, funding could be cut off or payback required.
Sections 501(c)(4), (5) and (6) organizations: These organizations (social welfare organizations, unions and business leagues, respectively) can and often do participate in political activity, but this activity, when combined with other activities that similarly do not further the tax-exempt purposes, must not be the organization’s primary intention. For example, these organizations often endorse a candidate for office, but it is permissible only when the costs associated with that endorsement are very small in relation to total organization expenditures.
Section 527 organizations: These are political action committees (PACs) whose sole purpose is to participate in politics; a PAC can get in trouble for performing activities that are not political. When a Section 501(c)(4), (5) or (6) organization wants to participate in political activities, it can establish a related PAC as a segregated fund — a Section 527 organization related to other tax-exempt organizations. This can be as easy as setting up a separate bank account and registering with the Federal Election Commission. Sometimes a separate legal entity under state law is created, but this is not required. Segregated funds are liable for paying income tax on the lesser of political contributions made or the investment income earned by the PAC. This is a small price to pay for sheltering your organization from the risk of overstepping its limits on political activity, with the risk being the loss of the parent organization’s tax-exempt status.
Structuring options make activity more viable
Supporting a platform or ideas that would benefit your organization’s mission is a valuable effort, and a win can create favorable changes. Your organization, especially if it is a Section 501(c)(4) social welfare organization, has more freedom to become politically involved thanks to the Supreme Court decision in Citizens United.1 This ruling reversed prior laws and enables corporations — including tax-exempt organizations — to make direct contributions to political campaigns. It benefits Section 501(c)(4) organizations in that donations listed on Form 990, Schedule B, can be anonymous, which is frequently desired by large donors to political candidates. Conversely, a Section 527 organization requires more public disclosure in election reports; names of large donors are made publicly available.
If your Section 501(c)(3) organization wants to engage in political activity, consider setting up a Section 501(c)(4) entity to handle the activities and contributions, taking advantage of the donor anonymity it allows. This is not a quick process. It can involve creating a legal entity, separate governance structure and application for recognition of tax-exempt status via Form 1024. At a minimum, the organization must notify the IRS of its existence within 60 days of formation.
Avoid “accidental electioneering”
Endorsing a candidate by name is clearly a political activity, but the activities that cause difficulties with the IRS are usually less obvious. The IRS performs a “facts and circumstances” analysis to determine if something is an allowable political activity. Charitable organizations — i.e., a Section 501(c)(3) — must be especially careful about this because of the complete prohibition against political activity. Other types of organizations must monitor how much time and money they spend on political activity.
If your organization wants to avoid political activity or limit the extent of activities, consider the following:
If you invite one candidate to speak at an event, also invite an opposing candidate. Be careful that both candidates have equal presentation opportunities — e.g., similar time length and type of meeting.
Outside groups often want to know a tax-exempt organization’s stand on a particular issue. To avoid political activity, instruct representatives of your organization to state that they are speaking in an individual capacity and not on behalf of the organization. An accusation of impermissible political activity could be made if the listener can infer from the comments whom is supported or opposed, even if the speaker does not name a preferred candidate. Representatives can talk about what your organization believes is a sound policy, but not a connection between your organization and a candidate.
Monitor your publications and meetings to prevent making statements about candidates.
Control links placed on your website. If they are not solely educational, they could be considered political. A link to information about a certain election issue may not be political activity, but a link to a politician or PAC would be.
Make the most of this election year to further your tax-exempt mission — but be intentional about your activities and keep them within the constraints of tax law.
Back to The State of the Not-for-Profit Sector in 2016
Register to replay the webcast, Political and lobbying activities by not-for-profit organizations in an election year: The do’s and don’ts to protect your tax-exempt status.