Charities – If the status quo is harming your ability to advance your mission consistent with your values, what can you do? What should you do?

The first question is a little easier to answer from a legal perspective. But I’ll try to provide a tiny amount of personal insights on the second question at the end of this post.

Background

I presented to the Nonprofit Activists Coalition earlier this week on what charities (and some other tax-exempt organizations) can do related to advocacy and lobbying. We had not planned to time this with the release of a new draft tax bill working its way through the House, but the draft reinforced why it’s so important for nonprofits collectively to inform their supporters, the general public, our lawmakers, and other political officials about what they do and what they contribute to making our communities, our country, and our planet healthier and stronger. While my presentation did not focus specifically on the draft bill, which is still being negotiated, nonprofits should pay attention to some of the relevant provisions.

Draft Tax Bill – Highlight of Some Nonprofit Provisions and Resources

Terrorist Supporting Organization (TSO) – 5/19 Update: These provisions have now been excluded from the bill.

Yes, the HR 9495 provisions are back again. There are a few tweaks to allow for certain humanitarian aid, but it’s still a terrible bill for the nonprofit sector and could be abused by the Treasury Secretary who would have unilateral authority to designate a TSO with some due process. Still, as I explain here, there are other existing laws that could be used to target a nonprofit’s tax-exemption, and organizations should not use all their resources just to fight this provision as there are so many other advocacy battles to come.

Increases to Private Foundation Excise Taxes on Net Investment Income

Currently, private foundations are subject to a 1.39 percent tax on their net investment income. The draft bill would raise this tax on private foundations with assets of over $50 million. The tiered rates based on the amount of assets go as high as 10 percent for private foundation with assets above $5 billion. While not too many people may be concerned about a large private foundation’s ability to operate subject to the substantial increases, charities that receive funding from private foundations should be concerned as such increases will deter private foundations from granting more than what is absolutely required (i.e., 5 percent).

Increases to Excise Taxes on Investment Income of Colleges and Universities

Currently, under a law passed by Congress during President Trump’s first administration, the excise tax on the net investment income of colleges and universities is 1.4 percent for private colleges and universities with at least 500 tuition-paying students and ‘endowment assets’ of at least $500,000 per student (applicable to a few dozen institutions). The draft bill would raise this tax to between 7 percent and 21 percent depending on the institution’s level of ‘endowment assets’ per student. Again, while not too many people may be concerned about the ability of a very large college or university to sustain its existence, such taxes will substantially reduce student aid, eliminate educational programs, harm talent acquisition, and reduce scientific research that has regularly led to groundbreaking changes. Negotiations related to the bill may also be used to chill academic dissent of government policies and priorities.

Changes to Unrelated Business Income Tax –

Currently, the general rule is that royalty income is not included in a tax-exempt organization’s unrelated business taxable income. The draft bill will result in the income from licensing of name and logo becoming taxable income. 5/19 Update: This provision has now been excluded from the bill.

There have been past unsuccessful attempts to create a tax on a tax-exempt organization’s expenditure on qualified transportation fringe benefits (e.g., parking for employees). The draft bill again includes this provision making such costs subject to the 21% unrelated business income tax.

Currently, the general rule is that income from scientific research in the public interest consistent with a nonprofit’s mission is tax-exempt. The draft bill would make it tax-exempt only if the scientific research is publicly available.

Charitable Deduction for Non-Itemizers

Currently, only about 10 percent of taxpayers, those who itemize their deductions rather than take the temporarily elevated standard deduction (set to expire after this year), get the benefit of a charitable deduction. The draft bill will extend and further raise the standard deduction (which has the effect of depressing charitable giving because of the loss of the tax incentive for many filers who previously itemized deductions but moved to the standard deduction). However, it will also introduce a new, temporary charitable deduction for taxpayers who do not itemize deductions. The caps will be $150 for single filers and $300 for married joint filers). The non-itemizer deduction has been championed by nonprofits for years, but some may view this as a ‘bone’ to nonprofits and strategic move to counter any dissent of all of the other harmful provisions to nonprofits and the communities they serve.

Cuts to Medicaid and SNAP (Food Stamps)

According to this AP article: “House Republicans have unveiled the cost-saving centerpiece of President Donald Trump’s “big, beautiful bill,” at least $880 billion in cuts largely to Medicaid to help cover the cost of $4.5 trillion in tax breaks.” Further, according to this NBC News article: “Monday night’s proposal from GOP members of the House Agriculture Committee would cut more than $290 billion from the Supplemental Nutrition Assistance Program, which helps over 42 million people nationwide purchase fresh produce and other groceries, according to the Agriculture Department.”

For more details on these and other provisions in the draft tax bill that are directly applicable to nonprofits, see:

Nonprofits Under Threat: What’s in the House Tax Bill and How You Can Help (National Council of Nonprofits)

One, Big, Beautiful Bill: Impact on Philanthropy (National Council on Nonprofits)

Additional Stuff You May Not Like

From What’s inside the House GOP’s budget bill? Here’s a look (PBS, AP)

• Elimination of a $200 tax on gun silencers.
• Goal of prohibiting Medicaid funds from going to Planned Parenthood, which would make it harder for millions of patients to get cancer screenings, pap tests and birth control.
• $46.5 billion for construction of the U.S.-Mexico border wall, and more money for the administration’s deportation agenda.
• Increased leasing of public lands for drilling, mining and logging.
• Authorization of sales of hundreds of thousands of acres of public lands in Nevada and Utah.

What Can You Do?

Lobbying

Public charities can lobby. Subject to certain limitations, they can act to influence legislation (laws created by legislative bodies). For most charities, by making the 501(h) election (a very simple filing to the IRS), the lobbying limits are quite generous (e.g., 20% of their first $500,000 of exempt purpose expenditures) and the penalties for exceeding the limits in any one year are relatively manageable.

Examples of legislation include (1) the Internal Revenue Code and more specifically, Section 501(c)(3), which includes the electioneering prohibition known as the Johnson Amendment, and Section 4940, which provides for the 1.39% excise tax on private foundation net investment income; and (2) the One, Big, Beautiful Bill, which includes the terrorist supporting organization provisions.

Advocacy Related to Executive Orders, Executive Branch Actions, Regulations and Rules

While public charity lobbying is subject to certain limits, mission-related advocacy related to executive branch actions are generally not subject to limitations under 501(c)(3). Accordingly, a public charity may be able to freely advocate for or against executive orders and other executive branch actions – including regulations, rules, and budget proposals – so long as it is in advancement of its mission.

Other Forms of Advocacy

Most forms of charity advocacy do not constitute lobbying. Stating the organization’s position on a public policy issues (e.g., climate change, racial equity, women’s rights); educating the public on broad social or economic problems (e.g., dangers of war, tariffs) without pointing to any specific legislation or without providing a call to action (e.g., telling the public to contact their legislator); sponsoring nonpartisan get-out-the-vote and voter registration drives; and organizing lawful protests, marches, or boycotts may all be perfectly acceptable activities without limitation if in support of a charity’s mission.

Supporting or Opposing Candidates for Public Office

501(c)(3) organizations are prohibited from supporting or opposing candidates for public office at any level (local, state, national, foreign). While the IRS has very rarely enforced compliance on this issue, it remains the law and a valid reason for revoking a charity’s tax exemption. Violations of the electioneering prohibition can occur in more subtle or indirect ways including by engaging in issue advocacy, publishing legislative scorecards, or sponsoring candidate appearances in a partisan manner.

Affiliated Organizations

501(c)(3) organizations may create and/or affiliate with other types of tax-exempt organizations, notably including 501(c)(4) social welfare organizations. Such affiliations are relatively common and can provide an ability for separate organizations within a common network to coordinate activities and share resources to further a common goal.

However, the affiliated organizations must maintain appropriate separation to mitigate against the risks of (1) attribution of one organization’s activities to the other (which could jeopardize the 501(c)(3) organization’s tax-exempt status and (2) liability ascending from one organization to the other. The 501(c)(3) organization must be particularly careful to ensure political intervention activities of an affiliated organization are not attributed to the 501(c)(3) organization due to its control of, or provision of resources to, its affiliate. Accordingly, the 501(c)(3) organization should generally make sure that it pays only its fair share for shared resources, including for costs related to “shared” employees, if such resources may be used by its affiliate to engage in political intervention activities.

A 501(c)(3) organization may make a grant to a 501(c)(4) organization, but the grant must be appropriately restricted so it cannot be used for any activity in which the 501(c)(3) grantor could not be engaged. There are two interesting provisions about 501(c)(4) organizations that may make their use beneficial as part of certain contingencies:

• A 501(c)(4) organization can self-declare its tax-exempt status and is not required to apply for recognition of tax-exempt status by the IRS (notice and annual filings, however, must be given to the IRS). Accordingly, a charitable nonprofit could create a nonprofit corporation tax-exempt under 501(c)(4) in a single day.
• Generally, a 501(c)(4) organization can have an identical mission to a 501(c)(3) organization and engage in all the activities of a 501(c)(3) activities (and more). It can also be a suitable grantee of a 501(c)(3) grantmaker, though a private foundation grantor would need to exercise expenditure responsibility to make such a grant.

Resources

Being A Player: A Guide to the IRS Lobbying Regulations for Advocacy Charities (AFJ Bolder Advocacy)

The Powerful, Free, and Easy 501(h) Election (National Council of Nonprofits)

Nonprofit Advocacy is More Than Lobbying

The Electioneering Prohibition: A Closer Look

Revenue Ruling 2007-41 (IRS)

Social welfare organizations (IRS)

The Practical Implications of Affiliated 501(c)(3)s and 501(c)(4)s

Affiliated Organizations: Sharing Employees

Affiliated Organizations: Sharing Resources

What Should You Do?

Perhaps the first thing you do as leaders of a charitable organization is determine the relative risks and the persons most impacted by the organization’s actions or inactions:

• What if you do nothing?
• What if you advocate for the things you want?

This exercise may benefit from dialogue with board members, staff members, and trusted allies and community members. Each organization must assess its own unique circumstances as to who to involve.

For some organizations, the risks of certain forms of advocacy may be so high – and not only to the organization and to its employees, but also to those dependent on the organization’s services – that the organization is chilled from acting other than to diminish its legal risks. For those organizations, the leadership may still be able to find ways to carefully yet effectively pursue their missions and values, which should never be ignored.

For example, equity values can be lawfully advanced through recruitment strategies, program design, outreach, investments, and alliances. The approach and public communications may change, but the mission, values, and respect for the communities should endure.

For other organizations, the risks of advocacy may not be particularly high, and they may be able to strengthen their commitments to their missions and values. The leadership of these organizations is pivotal to protect movements and Constitutional rights, particularly in times of great threats.

The purpose-driven board leadership (PDBL) model may further serve as a helpful guide for nonprofit leaders:

Purpose before organization

The organization’s purpose, particularly its mission and values, is the reason for its existence. Advancement of this purpose is even more important than preserving or strengthening the organization’s own existence. However, because these things are to some extent interdependent, leaders must also look beyond the short-term impacts of their decisions and actions. On one hand, an organization cannot advance its purpose if it no longer exists. On the other hand, if every organization prioritized its own existence when faced with an existential threat to their mission, the unchallenged threat would grow and perhaps eliminate any chance to advance that mission in the foreseeable future.

Respect for ecosystem

A charitable organization exists to benefit a community. And it likely holds as a core value respect for the members of its beneficiary community and for the broader communities impacted by the organization’s actions. A key characteristic of a community is the interdependence of its members, and organizational leaders must recognize the importance of these relationships and how their decisions and actions may strengthen or harm their communities and, by extension, the organization’s ability to advance its mission and values. Accordingly, systems to receive and incorporate input from the community are essential.

Equity mindset

Assuming an organization’s values include fairness and justice, all things considered, its leaders should consider how its decisions and actions advance equitable treatment of persons, including those belonging to marginalized groups. This generally requires continual education; critical interrogation about systems, policies, and processes; open and accurate feedback; distributed leadership; prudent resource allocations; and careful and strategic thinking.

Authorized voice and power

The continual development of authorized voice and power to serve and speak out for the communities an organization serves is the final principle of PDBL and is closely interrelated with the other three principles. If an organization is advocating for changes its leaders don’t realize will result in overall harm to its beneficiary community or to the communities in which it is a part, the organization may be doing more harm than good. If an organization fails to see changes it could lead because its leaders are not sufficiently representative of these communities, the organization may be doing more harm than good. These are the reasons why it is critical for organizations to pursue representative leadership practices.