501(h) election

Definition

The 501(h) election is an option for certain nonprofit organizations to elect to measure their lobbying activities under a more flexible expenditure-based standard rather than the stricter 'substantial part' test. This election allows organizations to engage in lobbying within specific financial limits, thus providing clarity and certainty regarding their advocacy efforts. By opting for this election, nonprofits can better manage their resources while still participating in the legislative process without risking their tax-exempt status.

5 Must Know Facts For Your Next Test

1. The 501(h) election is available for public charities classified under 501(c)(3) of the Internal Revenue Code.
2. Organizations that make the 501(h) election must report their lobbying expenditures on IRS Form 5768, which also allows them to set clear limits on their lobbying activities.
3. The limits on lobbying expenditures vary depending on the organization's size and can be up to a specified percentage of its total annual budget.
4. By choosing the 501(h) election, nonprofits can spend a larger percentage of their budget on lobbying without losing their tax-exempt status compared to those that do not elect this option.
5. Electing 501(h) provides nonprofits with a clearer framework for budgeting and planning their advocacy efforts, helping them navigate complex regulations.

Review Questions

• How does the 501(h) election impact the way nonprofits can engage in lobbying activities?
  • The 501(h) election allows nonprofits to measure their lobbying activities based on expenditure limits instead of the more ambiguous substantial part test. This gives organizations a clearer understanding of how much they can spend on lobbying without jeopardizing their tax-exempt status. It essentially provides a safer framework for advocacy, encouraging nonprofits to participate actively in the legislative process while managing their resources effectively.
• Compare and contrast the 501(h) election with the substantial part test for measuring lobbying activities in nonprofits.
  • The 501(h) election and the substantial part test represent two distinct approaches for assessing lobbying activities by nonprofits. The 501(h) election utilizes a clear expenditure-based limit that varies based on organizational size, which offers greater flexibility and certainty. In contrast, the substantial part test relies on subjective criteria about what constitutes a substantial part of an organization's overall activities, leading to potential ambiguity and risk regarding tax-exempt status. Nonprofits often prefer the 501(h) election for its straightforwardness.
• Evaluate the advantages and disadvantages of making the 501(h) election for a nonprofit organization considering its lobbying efforts.
  • Choosing to make the 501(h) election can offer several advantages for a nonprofit organization, including clearer guidelines for budgeting and an increased capacity to engage in lobbying activities without risking tax-exempt status. However, disadvantages may include additional administrative responsibilities such as filing IRS Form 5768 and strict compliance with the established expenditure limits. Nonprofits must weigh these pros and cons carefully, considering their advocacy goals and capacity to manage regulations effectively before deciding whether to elect 501(h).

Related terms

Lobbying: Lobbying refers to the act of attempting to influence decisions made by government officials, typically legislators or members of regulatory agencies.

Tax-exempt status: Tax-exempt status allows organizations, often nonprofits, to avoid federal income tax on income related to their charitable activities, provided they meet certain criteria.

Substantial part test: The substantial part test is a standard used to determine whether an organization's lobbying activities are considered substantial enough to jeopardize its tax-exempt status.