The Political Playbook for Tax-Exempt Organizations
With the general elections just around the corner, many tax-exempt organizations – from public charities to trade associations to corporate PACs – are asking the same question: How much political activity can we engage in before we put our tax-exempt status at risk?
The answer depends heavily on how your organization is structured. Below is a practical guide to the rules that apply to the three main types of tax-exempt entities involved in political and lobbying activity: 501(c)(3) charitable organizations, 501(c)(4) social welfare organizations, and Section 527 political action committees (PACs).
I. Charitable Organizations (501(c)(3)’s): Strict Limits, But Lobbying Is Permitted
501(c)(3) organizations operate under the most restrictive rules when it comes to political activity. The rules draw a sharp distinction between two types of activity: electoral campaigning and lobbying.
Electoral campaigning is categorically prohibited. The Internal Revenue Code of 1986, as amended (“Code”) flatly prohibits 501(c)(3) organizations from participating or intervening in any political campaign on behalf of – or in opposition to – any candidate for public office.1 This is an absolute ban, not a sliding scale. A single, significant violation can cost an organization its tax-exempt status.
Lobbying, on the other hand, is permitted – within limits. Qualified 501(c)(3) organizations may engage in lobbying activities,2 which include efforts to influence legislation at the federal, state, or local level, so long as lobbying does not constitute a “substantial part” of the organization’s overall activities.3
To take the guesswork out of what “substantial” means, a 501(c)(3) organization can make an expenditure test election, which provides a clear mathematical framework for tracking lobbying expenditures relative to overall program spending.4 For example, under the expenditure test, organizations with exempt purpose expenditures between $1.5 million and $17 million are capped at $225,000 in lobbying expenditures, plus five percent of exempt purpose expenditures above $1.5 million, tax-free.5 To illustrate: a charity spending $3 million annually on program services could spend up to $300,000 on lobbying activities.
Recordkeeping matters. 501(c)(3) organizations engaged in lobbying must maintain detailed records – not only to satisfy annual IRS Form 990 filing requirements, but also to demonstrate compliance with the expenditure test if the IRS ever comes knocking.
II. Social Welfare Organizations (501(c)(4)’s): Greater Flexibility for Political Engagement
501(c)(4) organizations6 – which include civic leagues and other organizations operated to promote social welfare – enjoy considerably more latitude than their 501(c)(3) counterparts when it comes to political activity.7
Lobbying is fully permitted. Unlike 501(c)(3)s, 501(c)(4) organizations (with some exceptions) may engage in substantial lobbying to advance their exempt purposes without the same expenditure caps that apply to 501(c)(3) organizations.8
Direct political campaigning is also allowed – up to a point. 501(c)(4)s may engage in direct political campaigning activity, subject to certain limits. The widely relied-upon 49% “rule” holds that a 501(c)(4) may maintain its tax-exempt status as long as no more than 49% of its time or expenditures are devoted to political campaigns.9
Important caveat – the legal landscape is shifting. In the post-Chevron era,10 a bright-line test for determining the permissible level of political activity has not yet been firmly established, and what qualifies as a “nonexempt activity” under the applicable regulations remains an open question.11 Organizations relying on the 49% “rule” should be aware that this framework may face increased scrutiny. What is firmly established is that a 501(c)(4) organization may not be engaged exclusively in political campaigning – some meaningful social welfare activity must remain the organization’s primary purpose.12
In short, 501(c)(4) organizations enjoy more flexibility than 501(c)(3) organizations for both lobbying and political campaign activities, making them a popular vehicle for organizations that want to engage meaningfully in the political process while retaining their tax-exempt status.
III. Political Action Committees (PACs / Section 527 Organizations): Built for Political Activity
PACs are typically set up by corporations, labor unions, trade associations, and other affiliated organizations specifically to solicit and make contributions connected to federal elections.13 The IRS classifies PACs as Section 527 “political organizations,” and Treasury Regulations define a political organization as “a party, committee, association, fund, or other organization . . . organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures for an exempt function activity.”14
PACs are not subject to income tax on their core activities. A PAC’s exempt function income – meaning income directly related to influencing or attempting to influence the selection, nomination, election or appointment of individuals to public office – is generally not subject to federal income tax.115 Exempt function income typically includes contributions of money or property, membership dues, and proceeds from fundraising events or the sale of campaign-related materials.16 Still, whether a function is truly exempt is based upon the individual facts and circumstances.17
But not all PAC income is tax-free. Income from investment activities, income from a trade or business (including, for example, renting excess office space to an unaffiliated organization), and any income earned during a period in which the PAC failed to file a required IRS Form 8871 (Political Organization Notice of Section 527 Status) is subject to tax.18
Filing obligations are significant. PACs must make a number of required filings with both the IRS and the Federal Election Commission (FEC) to maintain their status.19 These include Forms 8871 and 8872 with the IRS and the applicable disclosure reports with the FEC. Failure to file on time can lead to adverse tax consequences.
IV. Affiliated Organizations: Expanding What Your Organization Can Do
Many organizations find that a single entity structure limits their ability to pursue both charitable goals and political objectives. A common and well-recognized solution is the affiliated organization model – for example, pairing a 501(c)(3) with a 501(c)(4) affiliate that handles lobbying and advocacy.
Forming one or more affiliated organizations can expand the range of permissible activities available to a group, allowing it to advance its broader mission through entities that face fewer restrictions on political engagement.20
However, strict boundaries must be maintained between affiliates. The IRS scrutinizes these relationships carefully. Key rules include:
- A 501(c)(3) may not subsidize or fund a 501(c)(4)’s or PAC’s political activities, and neither the organization nor its officers may directly assist in those activities.21
- All transactions between affiliated organizations must be conducted at arm’s length. Direct payment of another entity’s expenses is strictly prohibited.22
- Each affiliated organization must be structured as a separate legal entity, with its own distinct books, records, and governance.23 Commingling resources or operations can jeopardize the exempt status of all entities in the structure.
V. The Bottom Line: Hodgson Russ Insights
The rules governing political activity by tax-exempt organizations are nuanced, and the stakes – potentially losing tax-exempt status – are high. The right structure for your organization depends on your goals, your existing entity type, and the nature of the political or lobbying activity you wish to pursue.
Whether you are considering a new PAC, exploring the creation of a 501(c)(4) affiliate, or simply trying to understand the limits of your current organization’s permissible activities, we encourage you to reach out to our team before taking action. Getting the structure right from the outset is far more efficient – and far less costly – than unwinding a problematic arrangement after the fact.
For more information on tax-exempt organizations and political activity, please contact Jennifer Aronson and Marla Waiss from the Tax-Exempt and Henry Zomerfeld from the Election Law/Campaign Finance Practice at Hodgson Russ LLP.
Disclaimer
This alert is a form of attorney advertising. Hodgson Russ LLP provides this information as a service to its clients and other readers for educational purposes only. Nothing in this client alert should be construed as, or relied upon, as legal advice or as creating a lawyer-client relationship.
1 Code Section 501(c)(3).
2 Code Section 501(h). Lobbying activities include activities conducted at the federal, state, or local level for the purposes of influencing the outcome of legislation, including attempts to influence legislation by communicating with legislators or political officials. See Code Sections 4911(c), (d).
3 Id.; Code Section 501(h); See Treas. Reg. Section 1.501(h)-1; IRS Publication 557 (1-2025) at 46 (Rev. Jan. 2025) [https://www.irs.gov/pub/irs-pdf/p557.pdf].
4 Id.; Code Section 501(h); Treas. Reg. Section 1.501(h)-1.
5 See Code Section 4911(c)(2).
6 Code Section 501(c)(4)(A). Social welfare organizations include civic leagues and organizations that are not organized for profit but are operated exclusively for public welfare. Id. Organizations considered 501(c)(4) organizations or have 501(c)(4) arms include: the American Civil Liberties Union (ACLU), the National Rifle Association (NRA), Planned Parenthood and the AARP.
7 Regan v. Taxation With Representation of Wash., 461 U.S. 540, 543 (1983) (“Section 501(c)(4) organizations, but not § 501(c)(3) organizations, are permitted to engage in substantial lobbying to advance their exempt purposes”); Treas. Reg. Section 1.501(c)(4)-1(a)(2); Rev. Rul. 67-293.
8 Regan, 461 U.S. at 543.
9 Citizens for Responsibility and Ethics in Washington v. United States, 21 F. Supp. 3d 25, 29 (D.D.C. 2014) (positing that 501(c)(4) organizations have advanced the 49% “rule” on the belief that the IRS is aware of the interpretation). The promotion of social welfare does not generally include political campaigning, but, if (c)(4) organizations are engaged primarily in social welfare activities, they may campaign. See Rev. Rul. 81-95.
10 In Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 883 (1984), the Supreme Court established the doctrine of "Chevron deference," under which courts were required to defer to a federal agency's reasonable interpretation of an ambiguous statute that the agency administered. In Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), the Supreme Court overruled Chevron, holding that courts must exercise their own independent judgment when interpreting statutes, rather than deferring to agency interpretations. The reference to the "post-Chevron era" here reflects the resulting uncertainty around how courts will now interpret IRS regulations and guidance governing the permissible level of political activity by 501(c)(4) organizations, which had previously benefited from judicial deference to the IRS's interpretive positions.
11 See Mem’l Hermann Accountable Care Org. v. Comm’r, 120 F.4th 215, 219-220 (5th Cir. 2024); see also Susan Leahy & Pooja Shah Kothari, 501(c)(4) Organizations Could Face Additional Scrutiny Following Court Decision, Covington Tax Insights (Nov. 1, 2024) [https://www.cov.com/en/news-and-insights/insights/2024/11/501-c-4-organizations-could-face-additional-scrutiny-following-court-decision].
12 See PLR 202247012 (Nov. 25, 2022) (“[a]n organization exempt under IRC 501(c)(4) may engage in some political campaign activities as long as it is primarily engaged in activities that promote social welfare”).
13 See 52 U.S.C. Section 30118.
14 Treas. Reg. Section 1.527-2(a)(1). See also PLR 8340029 (June 29, 1983).
15 Code Sections 527(a), (c). For example, a 527 organization that funds seminars intended to influence persons who support candidates whose philosophies are “in harmony with the political philosophy” of the organization may record the expenditures associated with these activities as those for an exempt function. Treas. Reg. Section 1.527-2(c)(5)(viii).
16 Code Section 527(c)(3); Treas. Reg. Section 1.527-2(a)(1).
17 Id.; Treas. Reg. Section 1.527-3(a)(1).
18 See Code Section 527(b), (c), (f); Treas. Reg. Section 1.527-4. See, e.g., IRS, Taxable income - Political organizations [https://www.irs.gov/charities-non-profits/political-organizations/taxable-income-political-organizations].
19 Required filings include, but are not limited to: (1) IRS Form 8871, Political Organization Notice of Section 527 Status; (2) IRS Form 8872, Political Organization Report of Contributions and Expenditures; (3) IRS Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations; (4) IRS Forms 990/990-EZ, Return of Organization Exempt from Income Tax. See, e.g., IRS, Filing requirements for political organizations [https://www.irs.gov/charities-non-profits/political-organizations/filing-requirements-for-political-organizations].
20 See Regan, 461 U.S. at 544 (noting that a 501(c)(3) and 501(c)(4) may have a dual structure to conduct lobbying activities); Ward L. Thomas & Judith Kindell, Affiliations Among Political, Lobbying and Educational Organizations, Ch. S, 2000 IRS EO CPE at 255, 263–264 [https://www.irs.gov/pub/irs-tege/eotopics00.pdf].
21 Id. at 264–65.
22 Id.
23 Id.