501(h) Lobbying Election Memo and Form 5768 Cover

501(h) LOBBYING ELECTION MEMORANDUM AND FORM 5768 COVER

TO: Board of Directors, [ORGANIZATION NAME]

FROM: [COUNSEL/EXECUTIVE DIRECTOR NAME], [TITLE]

DATE: [__/__/____]

RE: Recommendation for Elective 501(h) Expenditure Test for Lobbying Activities

EXECUTIVE SUMMARY

This memorandum recommends that [ORGANIZATION NAME] (the "Organization") adopt the elective expenditure test under 26 U.S.C. § 501(h) (the "501(h) Election") for measuring allowable lobbying activities. The 501(h) Election replaces the subjective and all-or-nothing "substantial part" test with an objective, sliding-scale expenditure ceiling. This election provides greater clarity, predictability, and compliance flexibility for the Organization's advocacy and lobbying programs.

Key Benefits:
☐ Objective lobbying expenditure limits (no "all-or-nothing" penalty)
☐ Sliding scale allows up to [ESTIMATED]% of exempt-purpose spending on lobbying
☐ Includes 25% grassroots sub-limit with separate tracking
☐ Excess expenditures trigger modest 25% excise tax rather than loss of tax-exempt status
☐ Encourages transparent, compliant advocacy work

I. ELIGIBILITY ANALYSIS

A. General Eligibility

The Organization is eligible for the 501(h) Election if it is:

1. A public charity (501(c)(3) organization)
2. NOT an integrated auxiliary of a church or religious organization
3. NOT a private foundation
4. NOT a Type III non-functionally-integrated supporting organization

B. Organization Status Verification

II. BACKGROUND: TWO LOBBYING STANDARDS FOR PUBLIC CHARITIES

A. Default Standard: "Substantial Part" Test (§ 501(c)(3) and Case Law)

Under the default lobbying standard, a public charity loses its tax-exempt status if it devotes a "substantial part" of its activities to attempts to influence legislation.

Weaknesses of the Substantial Part Test:

• Subjective: No bright-line expenditure threshold
• All-or-nothing: One determination of "substantial" can trigger full loss of tax-exempt status
• Ambiguous: Courts apply different standards; IRS guidance provides limited clarity
• Chilling effect: Organizations often restrict legitimate advocacy to avoid risk

B. Elective Standard: 501(h) Expenditure Test (26 U.S.C. § 501(h))

The 501(h) Election offers an alternative, objective approach based on expenditure limits and triggers a manageable excise tax rather than revocation.

Advantages of the 501(h) Expenditure Test:

• Objective: Numerical expenditure ceilings provide certainty
• Graded penalty: Excess expenditures trigger 25% excise tax on amount over limit (per § 4911)
• Safe harbor: Compliant organizations face no threat to tax-exempt status
• Transparency: Requires clear tracking and reporting on Form 990, Schedule C

III. EXPENDITURE LIMITS CALCULATION UNDER 501(h)

A. Three-Step Calculation

The 501(h) expenditure ceiling uses a sliding-scale formula based on Total Exempt Purpose Expenditures (TEPE):

Step 1: Calculate Total Exempt Purpose Expenditures (TEPE)

TEPE is the sum of all organizational expenditures directly in furtherance of the organization's exempt purposes (taken from Form 990, Part I, line 13, or total expenses minus unrelated business expenses).

Estimated Annual TEPE (Four-Year Average): $[_____________]

Step 2: Determine Overall Lobbying Limit (Sliding Scale)

Step 3: Calculate Grassroots Limit (25% of Overall Lobbying Ceiling)

Grassroots lobbying limit = 25% × Overall Lobbying Limit = $[____,___]

B. Illustrative Example

Organization with estimated $800,000 annual TEPE:

IV. DEFINITIONS: DIRECT LOBBYING, GRASSROOTS LOBBYING, AND EXCEPTIONS

A. Direct Lobbying

Direct lobbying is any attempt to influence legislation (or a proposed action by a legislative body) by a communication that:

1. Refers to specific legislation; AND
2. Expresses a view on the merits of that legislation; AND
3. Is directed to a member of a legislative body or staff member

Example: Email to U.S. Senator urging support for a specific tax bill.

B. Grassroots Lobbying

Grassroots lobbying is any attempt to influence legislation through public campaigns that:

1. Refer to specific legislation;
2. Express a view on the merits; AND
3. Include a call to action urging the recipient to contact legislators

Example: Newsletter urging members to call Congress to support a bill.

C. Lobbying Exceptions (Non-Lobbying Activities)

The following do NOT count as lobbying expenditures:

☐ Nonpartisan Analysis or Research: Objective examination of a legislative issue, presenting alternatives without taking a position

☐ Technical Advice to Legislators: Testimony, background papers, or data provided at the request of a legislative body or committee

☐ Self-Defense Communications: Advocacy by the organization concerning its own taxes, regulations, or filings (e.g., regulatory comment letters about rules affecting the organization)

☐ Examination or Discussion of Public Issues: General education about a topic (without calling for specific legislation or action)

☐ Internal Discussions: Boardroom communications or staff meetings analyzing potential legislative action

V. COMPLIANCE PROGRAM: TRACKING, RECORDKEEPING, AND REPORTING

A. Designated Lobbying Compliance Officer

Designate an employee or board member responsible for:

Name: [_________________________________]

Title: [_________________________________]

Responsibilities:

• Maintain complete lobbying expenditure records
• Ensure staff understand direct vs. grassroots classifications
• Prepare quarterly reports to executive leadership
• File Schedule C of Form 990 accurately
• Advise on expenditure projections to avoid exceeding ceilings

B. Recordkeeping Requirements

The Organization shall maintain the following records:

☐ Time Tracking: Allocation of employee hours to lobbying vs. non-lobbying activities
☐ Direct Lobbying Log: Date, subject, recipient, amount (staff time + out-of-pocket)
☐ Grassroots Lobbying Log: Date, communications method, content summary, amount
☐ Contractor/Consultant Invoices: For outside lobbying services (clearly labeled)
☐ Staff Cost Allocation: Percentages of time spent on lobbying by employee
☐ Spreadsheet or Database: Central tracking (Excel or accounting software)

C. Allocation of Shared Staff Costs

For employees whose time spans both lobbying and non-lobbying activities:

1. Obtain timesheets or contemporaneous estimates of % time on lobbying
2. Apply percentage to salary, benefits, and overhead allocation
3. Allocate to "direct" or "grassroots" bucket based on activity

Example: Executive Director spending 40% of time on government relations: 40% of salary/benefits counts as lobbying expenditure.

D. Quarterly Reconciliation

Prepare quarterly reports comparing actual lobbying expenditures to the annual ceiling:

VI. EXCISE TAX EXPOSURE UNDER 26 U.S.C. § 4911

A. Penalty Structure

If the Organization exceeds the 501(h) expenditure ceiling in a single year, a 25% excise tax is imposed on the excess amount (paid by the organization, not individuals).

Calculation:

Excise Tax = 25% × (Actual Lobbying Expenditures − Annual Ceiling)

Example: If ceiling is $145,000 and actual lobbying is $160,000, excise tax = 25% × $15,000 = $3,750

B. Grace Period: Four-Year Averaging

The determination of whether the organization has "normally" exceeded its limits (triggering loss of tax-exempt status) uses a four-year rolling average:

• If average of four prior years exceeds 150% of ceiling, tax-exempt status may be revoked
• This is a higher threshold than the single-year 25% excise tax
• Organizations receive substantial latitude to exceed limits occasionally

VII. RISK OF REVOCATION (RARE)

A. When Revocation Occurs

The IRS may revoke tax-exempt status only if the organization:

1. Elects 501(h)
2. Normally exceeds its expenditure limit (measured by four-year average)
3. Exceeds the limit by more than 50% (150% threshold)

Example: Four-year average lobbying = $217,500; annual ceiling = $145,000. Average is 150% of ceiling → potential revocation.

B. Practically Speaking

• This standard is difficult to trigger
• Single-year overages trigger only the 25% excise tax
• Revocation requires sustained, multi-year excess spending
• Most organizations complying with the expenditure test avoid revocation entirely

VIII. FORM 5768 FILING INSTRUCTIONS

A. Filing Deadline

File Form 5768 by the end of the tax year for which the 501(h) Election is first to be effective.

• 2026 Election (effective calendar year 2026): File by December 31, 2026
• Form 5768 filed in 2026 applies retroactively to 2026 and all subsequent years
• Form 5768 may be filed electronically or by paper mail

B. Where to File

Mail Form 5768 to:

Internal Revenue Service
Exempt Organizations
[Address per current IRS Form 5768 Instructions]

OR

File electronically if the Organization is in the IRS e-Services program.

C. Filing Authority

Form 5768 may be filed by:

☐ The Organization's principal officer (President, Executive Director)
☐ A member of the Board of Directors (by authorization)
☐ A tax professional on behalf of the Organization (with power of attorney)

D. Effectiveness

• Form 5768 filed in 2026 applies to 2026 and all subsequent years until revoked
• Election is permanent unless affirmatively revoked on a later Form 5768
• Revocation filed in a later year takes effect the next year

E. Revocation

To revoke the 501(h) Election and return to the "substantial part" test:

1. File a new Form 5768, checking the "revoke" box
2. Indicate year of revocation (election becomes effective next tax year)
3. Revocation is irrevocable for five years (cannot re-elect until six years have passed)

IX. BOARD RESOLUTION ADOPTING 501(h) ELECTION

RESOLVED, that the Board of Directors of [ORGANIZATION NAME], a [State] nonprofit corporation and exempt organization under 26 U.S.C. § 501(c)(3), hereby approves the election to be treated as an electing public charity under 26 U.S.C. § 501(h);

RESOLVED FURTHER, that the Board has determined the Organization meets all eligibility requirements for the 501(h) Election, including but not limited to:

• The Organization is a public charity (not a church, private foundation, or supporting organization)
• The Organization intends to maintain compliance with the objective expenditure test
• The Organization has adopted procedures for tracking, allocating, and reporting lobbying expenditures

RESOLVED FURTHER, that the Board authorizes [EXECUTIVE DIRECTOR/OFFICER NAME], as [TITLE], to execute and file Form 5768 with the Internal Revenue Service by December 31, [YEAR], electing the application of 26 U.S.C. § 501(h) for the tax year [YEAR] and all subsequent years;

RESOLVED FURTHER, that the Board designates [COMPLIANCE OFFICER NAME], as [TITLE], to serve as the Organization's lobbying compliance officer, responsible for maintaining records and reporting pursuant to 26 U.S.C. § 4911 and Treasury Regulation § 56.4911-2;

RESOLVED FURTHER, that the Board directs management to implement a compliance program including:

• Contemporaneous written allocation of staff time to lobbying vs. non-lobbying activities
• Quarterly reports to the Board comparing actual lobbying expenditures to calculated ceilings
• Accurate completion of Form 990, Schedule C (Lobbying Expenditures)
• Procedures for documenting nonpartisan analysis, technical advice, and self-defense communications

IN WITNESS WHEREOF, the undersigned officers of the Organization acknowledge adoption of this resolution:

Date: [__/__/____]

X. INTEGRATION WITH EXISTING ORGANIZATIONAL POLICIES

A. Advocacy and Public Policy Statement

Review and update the Organization's advocacy policy to:

☐ Affirm that the Organization intends to engage in lobbying and grassroots advocacy within 501(h) limits
☐ Define permitted lobbying activities and examples
☐ Prohibit activities that would exceed expenditure ceilings
☐ Assign responsibility for tracking to the compliance officer

B. Conflict of Interest and Disclosure

Ensure the Conflict of Interest Policy addresses:

☐ Board members who hold elected office or are paid lobbyists
☐ Staff dual roles (e.g., part-time legislative work elsewhere)
☐ Organizational obligation to disclose lobbying to IRS on Form 990

C. Accounting and Procurement

Coordinate with accounting and procurement to:

☐ Set up GL codes or budget lines for "Direct Lobbying" and "Grassroots Lobbying" expenditures
☐ Flag invoices from outside lobbyists or advocates for review
☐ Train staff on proper coding and allocation procedures

D. Grant and Donor Restrictions

Review grant agreements and donor gift agreements to confirm:

☐ No restrictions prohibit the Organization from engaging in lobbying
☐ Grants from government sources comply with lobbying limitations (may have different caps)
☐ Donor-restricted funds do not implicitly restrict legislative advocacy

XI. ADVANTAGES AND DISADVANTAGES SUMMARY

Advantages of 501(h) Election:

✓ Objectivity: Clear numerical limits replace subjective "substantial part" test
✓ Safety: Excise tax penalty replaces all-or-nothing loss of tax-exempt status
✓ Advocacy Clarity: Organization can confidently invest in legislative work within limits
✓ Transparency: Annual Form 990, Schedule C reporting demonstrates compliance
✓ Flexibility: Sliding scale allows larger organizations more lobbying room

Disadvantages or Limitations:

✗ Compliance Burden: Requires detailed time-tracking and record-keeping
✗ Quarterly Monitoring: Necessitates active tracking to avoid exceeding limits
✗ Excise Tax Risk: Excess expenditures trigger 25% tax (though single-year only)
✗ Election Permanence: Cannot easily revert; five-year waiting period if revoked
✗ Not Suitable If: Organization plans no lobbying, wishes to remain invisible on tax filings

When NOT to Elect 501(h):

• Organization never engages in legislative advocacy
• Organization wishes to keep lobbying activities private and off tax filings
• Organization has severe administrative constraints and cannot track lobbying
• Organization is a church, private foundation, or ineligible entity

XII. SOURCES AND REFERENCES

IRS Guidance:

• IRS Form 5768, Election/Revocation of Election by an Eligible Section 501(c)(3) Organization to Make Expenditures to Influence Legislation
• IRS Form 5768 Instructions
• IRS Publication 557, Tax-Exempt Status for Your Organization
• IRS Publication 970, Tax Benefits for Education (section on lobbying limitations)

Treasury Regulations:

• 26 CFR § 56.4911-1 through 56.4911-10 (Detailed rules on lobbying expenditures, definitions, and exceptions)

Statutes:

• 26 U.S.C. § 501(h) (Elective expenditure test)
• 26 U.S.C. § 4911 (Excise tax on excess lobbying)
• 26 U.S.C. § 501(c)(3) (Definition of tax-exempt charitable organization)

Additional Resources:

• Alliance for Justice, The 501(h) Election and Lobbying: A Guide for Charities (www.afj.org)
• OMB Watch (now UpTurn), 501(h) Election Resources
• National Council of Nonprofits, Nonprofit Lobbying Guide

APPENDIX: TRACKING LOG TEMPLATES

A. Direct Lobbying Tracking Log

B. Grassroots Lobbying Tracking Log

END OF TEMPLATE