Lobbying Rules for Nonprofits

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    Deborah G. Kosnett

    The Southern Building 805 15th Street NW, 9th FloorWashington, DC 20005

    202-419-5111 [email protected]

    Lobbying Rules forNot-for-Profits

    22nd Annual Not-For-Profit Organizations SymposiumGreater Washington Society of Certified Public Accountants

    Washington, D.C. December 13, 2010

    John Pomeranz

    1726 M Street, NW, Suite 600 Washington, DC 20036202-328-3500 [email protected]

    Agenda

    501(c)(3) Lobbying

    Lobbying by Other Tax-ExemptOrganizations

    Federal Lobbying Disclosure Act

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    501(c)(3) Lobbying: Two Tests

    No Substantial Part Test

    501(h) Expenditure Test

    No Substantial Part Test

    Lobbying must be no substantial part ofoverall activities

    Measures

    expenditures,

    volunteer and other cost-free activities,

    more? Potential loss of exemption

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    501(h) Expenditure Test

    Clear dollar-based limits

    only expenditures count

    volunteers and other cost-free things dont

    Clear definitions of lobbying

    Requires one-time election (Form 5768)

    Penalty for violations is generally an

    excise tax

    501(h) Lobbying Limits

    1. Calculate organizations exempt purpose expenditures

    2. Overall lobbying limit is:

    20% of first $500,00015% of next $500,00010% of next $500,000

    5% of remainder3. Grassroots lobbying limit is 25% of overall limit

    Up toabsolute

    cap of $1M

    Budget (for mostorganizations)

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    All Lobbying(Direct & GR)

    $240,000

    Overall Lobbying Limit

    $100,000+ $75,000+ $50,000+ $15,000

    TOTAL = $240,000

    501(c)(3) with $1.8M Budget

    Grassroots$60,000

    What is Lobbying?

    Call to Action

    General Public(Not members)

    Specific Legislation

    Expressing a View

    Communication

    Legislator (or other official orstaffer involved in legislation)

    Specific Legislation

    Expressing a View

    Communication

    Grassroots LobbyingGrassroots LobbyingDirect LobbyingDirect Lobbying

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    Key Point: Specific Legislation

    More than just legislation that has beenintroduced

    A bill

    Proposed legislation (e.g. model bills)

    Draft amendments

    Specific legislative policy proposals

    Congressional resolutions

    Treaties requiring Senate ratification

    NOT Specific Legislation

    Administrative rules

    Court opinions

    Agency decisions

    Executive orders

    Private (non-government) actions

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    Key Point: Call to Action

    Urging people to contact their legislator

    Providing contact information for alegislator

    Providing a postcard, petition, web link,or other means to contact a legislator

    Identifying legislators who are:

    - Representing reader- Undecided on legislation

    - Opposed to legislation- Voting on legislation

    Generally,no call to action, nograssroots lobbying

    Lobbying Exceptions:Nonpartisan Analysis, Study or Research

    Full and fair discussion of the issue

    Sufficient to allow independent conclusion

    OK to advocate a position

    Public distribution

    Not just to allies

    No direct call to action

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    Lobbying Exceptions:

    Request for Technical Advice

    Written request

    Government body

    Other Lobbying Exceptions:

    Self Defense lobbying on bill that would affect AVEFs

    existence or tax-exempt status)

    NOT lobbying for earmarks

    Discussions of issues of broad social

    importance NOT specific legislative proposals

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    21235412Hard TruthsProject

    Direct Lobbying

    9089889888888Total

    88Sick Leave

    Vacation

    GR Lobbying

    33GR Lobbying

    9324Direct Lobbying

    49843548786Better AmericaProject

    Total151413121110987654321May 2010

    Sample Timesheet

    In addition to allocatingstaff costs, use

    aggregate of staff timedata to allocate indirect

    costs for lobbying

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    Copyright Tate & Tryon 2010

    Lobbying: Section 501(c)(4), (5), (6)

    The Rules Are Different

    No lobbying limits, provided lobbying is related to purpose

    162(e) limits member dues deductibility, lobbying-dollarfor lobbying-dollar (Federal, state, but notlocal lobbying)

    Applies to 501(c)(4), (5) and (6) organizations (except for501(c)(4) veterans organizations and 501(c)(5) laborunions)

    Options:

    - Pass nondeductible lobbying costs through to members, via

    limits on deductibility of dues paid- Pay a 35% proxy tax on lobbying expenditures, so that

    members may deduct dues

    Copyright Tate & Tryon 2010

    Lobbying: Section 501(c)(4), (5), (6)

    Lobbying Includes Dollars Spent On . . .

    Influencing legislation through federaland statelobbyingcommunications (direct and grassroots), including any costsleading up to the communication

    Locallobbying communications are exempt

    Attempts to influence the general public, or segments of it,regarding legislation (grassroots)

    Attempts to influence a Covered Executive Branch Official

    (CEBO) with regard to his or her official actions or positions Monitoring is not lobbying . . . unless and until it leads to lobbying

    Congressional intent is that communication compelled bysubpoena or federal/state law is not lobbying . . . but pretty mucheverything else is.

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    Copyright Tate & Tryon 2010

    Lobbying: Section 501(c)(4), (5), (6)

    Who is a CEBO? Heres the IRS list . . .

    - The President and Vice President;

    - Any officer or employee of the White House office of the Executive Office ofthe President;

    - The 2 most senior officials at each of the other Executive agencies;

    - Any individual serving in a Level I position of the Executive Schedule andhis/her immediate deputy; and

    - Any Cabinet head and his/her immediate deputy.

    Or . . . you can just ask

    Rule also applies to LDA reporting . . . but the definitions

    different (broader) Be sure to specify which definition you need: IRS or LDA

    Copyright Tate & Tryon 2010

    Lobbying: Section 501(c)(4), (5), (6)

    Lobbying Disclosure and Tax

    No disclosure or proxy tax when:

    - Less than $2,000 is spent (in-house lobbying costs only)

    - Members cant deduct dues anyway (least 90 percent of the annual

    dues are not deductible by members as a business expense)

    Must keep records to substantiate!

    - Members (persons, families, entities) pay de minimisdues ($101 or

    less in 2009 - 501(c)(4) or (5) only! (Indexed for inflation) Proxy tax is an excise tax no estimates needed; no same

    accounting method requirement

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    Copyright Tate & Tryon 2010

    Lobbying: Section 501(c)(4), (5), (6)

    Disclosure Rule to Avoid Proxy Tax

    Provide members with an annual reasonable estimate ofthe portion of dues not deductible due to lobbying activity- Estimate must be provided at the time of assessmentor payment

    - Must be presented in a conspicuous and easily recognizable format

    Copyright Tate & Tryon 2010

    Lobbying: Section 501(c)(4), (5), (6)

    Lobbying Expenses

    May calculate lobbying expenditures using any reasonable

    method

    Nevertheless, IRS gives you two easy methods, one hard

    method

    - Gross-up method

    - Ratio method

    - 263A method

    Dont forget PAC admin expenditures - also included

    Taxable political expenditures are notincluded

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    Copyright Tate & Tryon 2010

    Lobbying: Section 501(c)(4), (5), (6)

    Calculation Methods Gross-up method:

    - Lobbying salaries x 175% (225% if not including admin)

    - Add: T&E expense, dollars paid outside lobbyists, dues paid toother organizations that lobby, and PAC administrative expenses

    Ratio method:

    Lobbying labor hours

    ----------------------------- X Total cost of operations (excl o/s costs)

    Total labor hours

    - Add: T&E expense, dollars paid outside lobbyists, dues paid toother organizations that lobby, and PAC administrative expenses

    263A method usually not worth the effort

    Copyright Tate & Tryon 2010

    Lobbying: Section 501(c)(4), (5), (6)

    De minimisrules all methods

    Time spent by an individual on lobbying activities may be treated

    as zero, if less than 5%

    Nevertheless, all hours spent by a person on direct contact

    lobbying may be counted as labor hours allocable to lobbying

    activities

    - Direct contact lobbying - meeting, telephone conversation, letter,

    etc. with legislator or covered executive branch official- Does not include time of those persons exclusively doing research,

    preparation, and other background activities

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    Copyright Tate & Tryon 2010

    Lobbying: Section 501(c)(4), (5), (6)

    Remember . . .

    Non-deductibility disclosure is always a prospectiveestimate

    True it up each year: roll overage or under-age forward (both

    are permitted, at least informally) this is the proxy tax waiver

    Be sure to make a good-faith estimate, or else IRS could deny

    the waiver

    In an associations finalyear, any overage most likely will be

    subject to a proxy tax

    Amount subject to proxy tax is capped at 100% of dues

    Report and pay tax on Form 990-T

    IRS rules may be used to comply with LDA reporting

    Copyright Tate & Tryon 2010

    Lobbying: Section 501(c)(4), (5), (6)

    Important Planning Tip! Even if you never, everplan to lobby

    - Put a non-deductibility disclosure on your dues notices AND membershipapplications even 0.01% should save you from the proxy tax

    - Do NOT forget internet membership applications! Both interactive and PDF

    - Planning to dissolve? Aim for a lobbying expense under-age in yourdissolution year

    Sample disclosure:Dues payments, contributions or gifts to XYZ Association are not tax deductible

    as charitable contributions for federal income tax purposes. However, they maybe deductible as ordinary and necessary business expenses subject torestrictions imposed as a result of XYZ's lobbying activities as defined by theBudget Reconciliation Act of 1993. XYZ estimates that the nondeductibleportion of your 20XX dues -- the portion that is allocable to lobbying -- is0.05%."

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    Federal Lobbying Disclosure Act

    (LDA) Does not limit the amount of lobbying theorganization may do

    Requires public disclosure of lobbying activities

    Uses a different definition of lobbying Except charities using the 501(h) election may use

    that definition for some purposes

    Applies to all entities (although tax-exemptorganizations have some special rules)

    States (and somelocalities) have similar

    disclosure laws

    Lobbying: Tax vs. LDA

    Includes federal,state, NOT local

    Includes grassroots

    Includes executivebranch actions byCEBOs

    Slightly different

    exceptions

    Includes federal,state, and local

    Includes grassroots

    No non-legislativeactions (but exec.branch officials canbe lobbied)

    Slightly differentexceptions

    Federal only

    No grassroots

    Includes executivebranch actions(CEBOs plus)

    Slightly differentexceptions

    501(c)(4), (5), (6)(IRC 162(e))

    501(c)(3)(IRC 4911)

    LDA

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    LDA Registration

    One or more Lobbyists

    20% of time spent lobbying in 3 month period

    More than one lobbying contact

    $10,000 spent on lobbying in 3 month period

    501(h)-electing 501(c)(3)s may use that definition

    501(c)s subject to 162(e) may use that definition

    Register via Form LD-1 (electronic)

    LDA Reporting

    Quarterly (Form LD-2)

    Due 4/21, 7/21, 10/20, and 1/20

    Report:

    Lobbyist names

    Issue areas (both general and specific)

    Expenditures (nearest $10,000)

    Semi-Annual (Form LD-203)

    Separate filings for organization and lobbyists

    Report political contributions and other info