In a presidential election year, tax-exempt organizations might consider becoming more active in the political process. For example, there are nonprofits that regularly engage in neutral, nonpartisan voter registration and get-out-the-vote drives. Others might go a step further and view campaign season as an opportunity to raise public awareness of an issue of particular interest to the organization or to influence the passage of related legislation. When such increased political activity crosses into an attempt by the organization to elect a candidate or slate of candidates based on their position on the issues, the result could have negative tax consequences.
Under Internal Revenue Code section 501(c)(3), a nonprofit organization may not qualify for tax-exempt status unless it not only meets the requirement of operating for an exempt purpose, but also refrains from participating or intervening in “any political campaign on behalf of (or in opposition to) any candidate for public office.” Campaign regulations clarify that a 501(c)(3) making any written or oral statements for or against a candidate for public office, including the rating of candidates on a nonpartisan basis, constitutes political campaigning and is prohibited. The prohibition on participation in campaign activities is absolute, and 501(c)(3) organizations must use caution not to wander into questionable activities that might put their tax-exempt status at risk.
Nonprofits often participate in political activities without displaying partisanship or explicitly endorsing a particular candidate. In such circumstances, steering clear of risk can still prove difficult. There is no bright-line test for determining if the 501(c)(3) participated or intervened in a political campaign, and all facts and circumstances must be considered to determine whether the organization engaged in some reasonably overt communication that supports or opposes a political candidate. Even educational organizations can inadvertently cross the line if their communication drifts toward advocacy, such as presenting conclusions unsupported by facts or based on opinions rather than objective evaluations.
When a nonprofit supports or opposes an initiative or referendum, such activity is typically considered to be lobbying rather than prohibited political campaign activity. A 501(c)(3) organization is permitted to engage in limited lobbying activity, but risks tax implications if a substantial part of its activities amount to attempting to influence legislation. This limitation is less restrictive for nonprofit organizations described in other subsections of IRC 501(c), such as subsection (c)(4) for social welfare organizations, (c)(5) for agricultural organizations or unions, or (c)(6) for business leagues and trade boards. These organizations can generally engage in lobbying in support of their exempt purpose provided they stop short of promoting or opposing candidates for office.
The prohibition on campaigning activity also extends to financial contributions. IRC 501(c)(3) organizations may not make monetary contributions to any political organization governed by IRC 527, such as a candidate committee, political party committee, or political action committee (PAC). However, a 501(c)(3) organization is permitted to make a contribution to a ballot measure committee that supports or opposes a ballot initiative or referendum, but also must include such contributions in its accounting for purposes of determining whether a substantial part of the nonprofit’s activities consist of lobbying.
Violating the ban on political campaign activity could potentially result in denial or revocation of a nonprofit organization’s tax-exempt status, as well as the imposition of an excise tax on the amount of money spent on the prohibited activity. During this election year, 501(c)(3) organizations in the Commonwealth should become intimately familiar with the restrictions on political contributions and campaign activities to keep their tax-exempt status secure.
For more information, contact Bill Speros at 814/870-7764 or wsperos@mijb.com.
Bill Speros is a partner at MacDonald Illig. He represents for-profit and nonprofit clients on contract formation and related litigation in state and federal courts. He is also the solicitor for Erie County.
