Nonprofit Political Activity

Campaign Finance, Lobbying, & Politics
For Advocacy Organizations & Nonprofits

Campaign Finance Laws vs IRS Exemptions

Compliance with election finance laws and qualification for IRS tax exemptions ARE TOTALLY SEPARATE ISSUES.

Regulation of Election Financing

Election financing is regulated by both the Federal Election Commission (FEC) and the Florida Department of State.

Contributions by Individuals: As a general rule only individuals can directly make expenditures to expressly advocate for the election or defeat of a candidate or the passage or defeat of an issue.

Contributions by Corporations: Corporations can NOT directly make such expenditures. They can do it ONLY if done through registered "political action committees" (or PACs)

Generally, PACs must register with the FEC, the State or both. The registration process involves filling out and submitting forms. PAC's must file periodic reports.

Federal Tax Exemptions for Advocacy Organizations

Section 501(c)(3).

To qualify organizations must operate exclusively for charitable, educational or religious purpose.

Influencing legislation ("lobbying") permitted only if not "substantial". There are two alternate tests to determining whether lobbying is "substantial" (the organization can choose one or the other):

the "facts and circumstances" test - (unpredictable in close cases)
expenditure test - (fill out annual form to calculate maximum permitted lobbying expenditures)

NOTE: activities that merely "educate the public about important issues" are not considered lobbying. Thus the Sierra Club qualifies as a 501(c)(3) educational organization because it merely educates the public about important environmental issues (through its website, seminars, publications, policy papers, etc.) and DOES NOT directly itself contact legislators to support specific legislation nor does it urge others to contact legislators for the same purpose.

Section 501(c)(4)

Exemption for civic leagues and "social welfare organizations". A social welfare organization must be organized primarily to promote (in some way) the common good and general welfare of the people of the community (such as by bringing about civic betterment and social improvements).

"Lobbying" can be considered "social welfare" BUT social welfare does NOT include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. Such expenditures may be made only if the activities do not constitute the organization's primary activity.

Section 527 - "Political Organizations"

Section 527 of the IRS Code grants and exemption for "political organizations". Section 527 has an exceptionally broad definition of "political organization" and thus can include both partisan organizations that support candidates and parties (which require registration as a PAC) and nonpartisan issue oriented ideological organizations (not requiring PAC registration).

Such organizations must pay tax on investment income but don't have to pay tax on money received through contributions.

Failure to be treated as a 527 organization would be no big deal but the entity would have to file a corporate tax return each year (Form 1120)

To get the benefit of this designation the organization must self declare with the IRS. That is, the organization must notify the IRS that it is a political organization where electioneering is its primary purpose.

To self declare the organization must file an initial IRS Form 8871 electronically within 24 hours of the date that the organization was established.

In each subsequent year an electronic report of contributions and expenditures must be submitted (IRS Form 8872)

Understanding the Difference Between the Exemption Types

It is necessary to understand how the tax law treats electioneering expenditures. In a variety of ways, the federal income tax laws ensure that funds used for electioneering consist exclusively of dollars that have already been taxed (after-tax money). In this regard, electioneering expenditures are taxed in the same way as funds spent on ordinary consumption items,such as food, drink, and entertainment. The tax laws contain interconnected rules to ensure this result.

First and foremost, the code denies individuals and businesses any deduction for campaign contributions and similar expenditures. Denying this deduction ensures that campaign contributions are comprised of after-tax money.

Second, the code contains a special rule applicable to 501(c)(3) charities to prevent circumvention of this non-deductible treatment. Charities, such as the United Way, are absolutely barred from engaging in any level of electioneering. Because charities are uniquely able to receive tax deductible contributions, without the prohibition on electioneering donors could effectively deduct their campaign contributions by giving tax-deductible contributions to charities, which could then use the donations to support their donors' favored candidates.

Third, the code includes a different anti-circumvention rule applicable to tax-exempt organizations (other than charities). Tax exempt organizations, like 501(c)(4) social welfare groups such as the AARP, cannot receive tax-deductible contributions but are able to generate tax-exempt investment income. Unlike charities, these organizations are not barred from electioneering. Accordingly, without a special rule, 501(c)(4) organizations could use their untaxed investment yield to support a candidate, thus circumventing the principle that only after-tax dollars be used for this purpose. Section 527(f) closes this loophole by imposing a special tax on tax-exempt organizations that engage in electioneering.

Finally, the tax code includes section 527, which covers organizations whose primary purpose is to electioneer. Donors to a 527 organization cannot deduct their contributions and all of the 527 organization's investment income is subject to tax at the highest marginal rate applicable to corporations. As a result, all of a 527 organization's electioneering expenditures are funded with after-tax dollars. Together, these rules operate to ensure that electioneering expenditures are made only with after-tax dollars, regardless of whether they are made by individuals, businesses, charities, tax-exempt organizations, or 527 organizations