To Lobby or Not to Lobby: Understanding Your Association’s Rights

Many non-profit organizations are explicitly prohibited from conducting lobbying activities. To do so might jeopardize their tax-exempt status. Others are permitted to make a special election to conduct limited lobbying activities, while others carry on lobbying activities with some “compliance strings” attached. Where does your Association fit?

Understanding Your Association’s Tax-Exempt Categories

Associations tend to be exempt from income tax under one of a few specific sections of the Internal Revenue Code (IRC) listed below:

• IRC 501(c)(4) – Social Welfare Organizations
• IRC 501(c)(5) – Labor, Agriculture and Horticultural Organizations
• IRC 501(c)(6) – Business Leagues

Associations exempt from income tax under these sections are permitted to carry on lobbying activities. However, they are required to notify members about their lobbying activites and expenditures.

Defining Lobbying Activities

The IRC describes lobbying as “attempting to influence legislation at the federal, state, or local level through communication with a member or employee of a legislative body, or with a government official or employee who may participate in formulating legislation” (IRC 162(e)(2) and (4)(A)).

Calculating and Reporting Lobbying Expenditures

If associations choose to lobby, the Association must determine the amounts expended in connection with lobbying efforts. Total expenditures include items such as payments made to a third-party lobbying firm, allocations of salary and related expenses for in-house personnel involved in lobbying efforts, and the allocation of certain overhead expenses incurred to support those in-house personnel. Once determined, associations must notify members of the number of member dues that are nondeductible for income tax purposes due to the associations’ expenditures related to lobbying efforts.

For example, if an association estimates that its lobbying expenditures for the coming year will be $200,000 and that total membership dues to be collected will be $1,000,000, the association would notify members that 20% of their dues are nondeductible for income tax purposes due to lobbying efforts. This notice is often included on the member dues invoice.

Exceptions to the Rule: When Notification is Not Necessary

As is the case with many requirements, there are exceptions – IRC 501(c)(4), (5) and (6) organizations are not required to provide notice to members if more than 90% of their dues are received from:

• Organizations exempt from income tax under IRC 501(a), other than IRC 501(c)(4), (5), and (6) organizations.
• State and local governments.
• Entities exempt from income tax under IRC 115.
• Local associations of employees and veterans that are not IRC 501(c)(4) organizations.
• Labor unions or other labor organizations that are not IRC(c)(5) organizations.

Further, IRC 501(c)(4), (5), and (6) organizations are not required to provide notice to members if one of the following applies:

• Organizations meeting the de minimis exception (i.e., less than $2,000 spent on lobbying for the year in question).
• IRC 501(c)(4) and (5) organizations receiving more than 90% of their member dues from individual member dues of $132 for 2023 (indexed for inflation annually).
• Local associations of employees and veterans described in IRC 501(c)(4), excluding social welfare organizations.
• Labor unions and other labor organizations described in IRC 501(c)(5), excluding agricultural or horticultural organizations.
• Non-membership organizations.
• Organizations with an IRS private letter ruling.
• Organizations maintaining records to substantiate that 90% or more of its members cannot deduct their dues for income tax purposes.

Ensuring Compliance for Lobbying Associations

If your association is considering engaging in lobbying activities, it’s crucial to assess whether member notification requirements bind you. Compliance is key: precise tracking of expenditures and transparent communication with your members is a must. Contact your CRI advisor to guide you through implementing effective policies and procedures. Our team of experts is ready to help you answer these questions and implement policies and procedures to comply with and protect your organization’s tax-exempt status.