1. The Default Rule: The “Substantial Part” Test

By default, all 501(c)(3) charities are subject to the IRS’s substantial part test, which prohibits a nonprofit from devoting a “substantial part” of its activities to attempting to influence legislation.

The IRS has never provided a bright‑line definition of “substantial,” which makes the rule feel a lot like a guessing game. Courts have found lobbying equaling 16–20% of total expenditures to be substantial, but the IRS has also rejected applications where lobbying was under 5%.

The uncertainty surrounding this test can have high stakes because violating this rule can result in excise taxes and potential loss of tax‑exempt status.

2. The Optional Alternative: The 501(h) Expenditure Test

Eligible nonprofits may elect into the Section 501(h) expenditure test by filing Form 5768. This replaces the subjective substantial part test with clear dollar limits based on exempt purpose expenditures.

Under the 501(h) expenditure test, a nonprofit’s tax‑exempt status isn’t put at risk simply because it engages in lobbying. Instead, the IRS gives charities a specific dollar amount they’re allowed to spend on lobbying each year, based on the size of their overall budget. As long as the organization stays within those dollar limits, lobbying will not be considered excessive.

For example, if a nonprofit spends more than $1.5 million but less than $17 million on its charitable programs and operations in a year, the IRS allows it to spend $225,000 plus 5% of the amount over $1.5 million on lobbying. That becomes the organization’s “nontaxable lobbying amount” for the year — meaning lobbying within that threshold does not jeopardize its 501(c)(3) status.

3. What Counts as Lobbying?

Lobbying generally includes attempts to influence specific legislation through direct communications with policymakers or grassroots efforts encouraging the public to contact legislators. A recent private letter ruling by the IRS suggests that the IRS will consider a nonprofit representative’s meeting with legislators to educate them on the effects of a particular piece of legislation as lobbying, so all expenditures for such meetings should likely be considered when analyzing whether an organization’s lobbying activities are “substantial.”

However, nonpartisan analysis, research, and technical advice requested by a governmental body are typically not considered lobbying.

4. Distinguishing Lobbying from Political Campaign Activity

Political campaign activity—supporting or opposing candidates for public office—is strictly prohibited for 501(c)(3) organizations. Nonprofits must be cautious to ensure no activities appear to favor or oppose candidates. However, recent actions by the IRS and some courts have suggested that this rule may be weakening with regard to churches’ rights to endorse political candidates.

5. Reporting Requirements: Schedule C

Nonprofits engaged in lobbying must report activities on Schedule C of Form 990. The structure of reporting depends on whether the organization elected the 501(h) expenditure test.

Conclusion

To summarize, nonprofits may engage in some lobbying, but only within complex limits. Legal counsel should be consulted before undertaking any significant legislative advocacy or before electing the 501(h) expenditure test. Our firm is here to help your nonprofit analyze these complexities and make a well-informed decision.