Cautions About Political Activity (Especially in an Election Year)

By R. Michael Sorrells, Cherry, Bekaert & Holland, L.L.P. (CB&H)
Email: msorrells@cbh.com

Every election year, the IRS takes a much closer look at the political activities of nonprofit organizations, concentrating its scrutiny toward charitable organizations. And every election year, a fairly large number of organizations end up being examined by the IRS with excise taxes, penalties and (in a few cases) loss of exempt status being the result. It is important to note that a significant number of those being examined are churches and religious organizations. As it has done over the past several election cycles, the IRS released a warning in November 2007 reminding organizations of these rules.

For charitable organizations (including religious), the rules are simple: there is an absolute prohibition against political activity. Political activity is generally any intervention in a political campaign. Examples of this are endorsements, campaign contributions, promotion on behalf of candidates and a host of other activities supporting particular candidates, slates or political parties.

It is also important to make the distinction between political activity and lobbying. Lobbying is generally support for particular legislation. Charitable organizations and most other nonprofit organizations are allowed certain amounts of lobbying activity.

Non-charitable exempt organizations, such as 501(c)(6) trade associations, are allowed to engage in political activity, but at a steep price: for political expenditures, they are required to pay a 35 percent tax on the amount of the expenditure. The only nonprofit organizations allowed to engage in political activity without being penalized are Section 527 political organizations (including political action committees, political parties, candidate committees, etc).

527 organizations have political activity as their exempt purpose, so such activity is exactly what they should be doing. 527 organizations, however, fall under a heavy load of increasingly complex reporting and regulatory compliance rules at both the Federal and state level. Charitable organizations cannot sponsor 527 political action committees, but other nonprofit organizations may generally do so.

The charitable section of the IRS Web site, IRS.gov, contains a lot of good information concerning political activity. There are links to IRS studies on this activity and a revenue ruling that provides a lot of specific examples. Additionally, IRS Publication 1828, Tax Guide for Churches and Religious Organizations, contains useful information about how these rules applies to churches.

This is the time to take a look around your organization for any political activity and to educate management and employees about the rules. If there areas of uncertainty, consultation with outside advisors is a great idea as early as possible: it is always easier to correct a problem before the IRS calls.

Mike is a Partner with CB&H’s Not-For-Profit Industry Group and Director of the Firm’s Nonprofit Tax Services.