The 20 Percent Rule for Political Activities
For many organizations considering whether to apply for federal tax-exempt status, the rule strictly governing the political activities of a 501(c)(3) nonprofit can be a huge issue. Even organizations that might never consider themselves “political” in any traditional sense must be aware of the rules and go out of their way to adhere to them.
There are many situations in which candidates for public office, ballot initiatives, or pending legislation might directly affect your organization and its mission, so this will always be an area that needs attention.
As part of becoming a 501(c)(3) organization, you agreed not to participate directly in political campaigns. Be careful that your organization does not appear to be directly involved in any political campaign. This occurrence will place your status in jeopardy very quickly.
To quote the instructions for the tax-exemption application (IRS Form 557), “The organization will not, as a substantial part of its activities, attempt to influence legislation or participate to any extent in a political campaign for or against any candidate for public office.” In other words, just don't do it!
With this said, there is the 20 percent rule, which allows a 501(c)(3) nonprofit to spend up to 20 percent of its tax-exempt operating budget on lobbying efforts, although never on advocacy for a particular candidate or ballot initiative.
These restrictions do not limit the individuals within your organization. They can work for candidates or campaign for initiatives, but as a 501(c)(3) organization, you agreed not to involve yourselves with any campaign for office or any ballot issue.
However, as an organization, you may be involved in general voter education about issues that are relevant to your group, as long as all points of view are presented. You can host forums with candidates or initiative sponsors or opponents, but you may not advocate for one side.
How can an advocacy group holding a 501(c)(3) tax exemption be involved in the community and not place its nonprofit status in jeopardy?
Conducting voter education on the broader issue will not jeopardize an organization's nonprofit status. For example, instead of advocating for a particular park department levy, a group could educate its community about the general advantages of parks and open space.
Political Rules for 501(c)(4) Organizations
A 501(c)(4) organization adheres to a different set of rules when it comes to political activity.
Although there is not a prohibition on advocating for any particular candidate or ballot initiative, a group may only do so if the advocacy is not the primary purpose of the group. A 501(c)(4) may, however, spend unlimited funds on general lobbying efforts without jeopardizing its tax-exempt status. It's not bound by the 20 percent rule, but the money spent on direct political campaigning (as opposed to lobbying) may become taxable.
To a casual observer, the difference may not be apparent, but it is actually substantial. As a publicly supported charity that receives contributions that are tax-deductible, a 501(c)(3) is held to the highest standard with regard to interference in the political process. A 501(c)(4) is still exempt from federal corporate taxes, but contributors do not deduct the money they donate from their income taxes, so advocacy for a cause or issue is permitted.
527s, or groups operating under Section 527, exist solely to advocate for a political cause or issue. They may not expressly advocate for a candidate, only for an issue (which may be remarkably close to a candidate). There can be no coordination between any political campaign and the activities of a 527 group. These groups are tax-exempt.
If an organization obtains its 501(c)(3) status and then violates the restriction on lobbying activities or involvement in political activities and loses its status, it will not be able to qualify later for the 501(c)(4) status. These rules are serious, so avoid taking chances that might result in losing your exemption status.
These distinctions are important to understand as you decide exactly what route you want your group to follow. The choice you make now will affect how your organization will operate from this moment forward.