501(h) Expenditure Test: 501(c)(3) Lobbying Limits and Election

The 501(h) expenditure test is an elective set of rules that lets an eligible 501(c)(3) public charity measure its lobbying against fixed dollar limits instead of the IRS’s default “substantial part” standard. You opt in by filing a one-page IRS form, and from that point on your lobbying ceiling is a formula tied to your total exempt purpose spending, capped at $1,000,000 per year. The appeal is certainty: instead of hoping the IRS agrees that your lobbying was not “substantial” based on all the facts and circumstances, you know the number.

Who Can Elect and Who Cannot

Most 501(c)(3) public charities are eligible. The statute names educational institutions, hospitals and medical research organizations, entities supporting government schools, organizations publicly supported by charitable contributions, agricultural research organizations, and organizations publicly supported through admissions or sales revenue.¹ Supporting organizations under Section 509(a)(3) also qualify, with a narrow exception for those connected to churches.

Three types of organizations cannot make the election:

Churches described in Section 170(b)(1)(A)(i)
Integrated auxiliaries of a church or of a convention or association of churches
Affiliated group members where at least one member of the group is a church or integrated auxiliary

Private foundations are also ineligible, but for a different reason: they face an outright ban on lobbying rather than a spending threshold.² Any organization that falls into an excluded category stays under the substantial part test by default.

How the Dollar Limits Are Calculated

Your lobbying ceiling is a sliding percentage of your exempt purpose expenditures for the year:³

Up to $500,000 in exempt purpose expenditures: 20% of that amount
$500,000 to $1,000,000: $100,000 plus 15% of the amount over $500,000
$1,000,000 to $1,500,000: $175,000 plus 10% of the amount over $1,000,000
Over $1,500,000: $225,000 plus 5% of the amount over $1,500,000

The lobbying nontaxable amount is capped at $1,000,000 per year no matter how large the organization is. That ceiling arrives at $17,000,000 in exempt purpose expenditures. Additional spending above that point buys no more lobbying room.

Grassroots lobbying has its own sub-ceiling of 25% of the total lobbying nontaxable amount. An organization with $600,000 in exempt purpose expenditures has an overall lobbying limit of $115,000 ($100,000 plus 15% of the $100,000 over $500,000) and a grassroots limit of $28,750.

Exempt purpose expenditures include essentially everything the organization spends carrying out its charitable mission: program costs, salaries, rent, utilities, depreciation, and administrative overhead. Fundraising costs are excluded from the calculation.

What Counts as Lobbying

The expenditure test sorts lobbying into two categories. Which bucket a communication falls into matters, because the grassroots limit is much tighter than the overall one.

Direct Lobbying

Direct lobbying means communicating with a member or employee of a legislative body, or with a government official involved in drafting legislation, where the communication refers to specific legislation and expresses a position on it.⁴ Both elements have to be present. Meeting with a senator’s staffer to discuss hunger policy in general terms is not direct lobbying. The same meeting becomes direct lobbying the moment your organization asks the staffer to support or oppose a specific bill.

Grassroots Lobbying

Grassroots lobbying targets the general public. It involves communications that refer to specific legislation, reflect a view on it, and encourage the audience to contact their representatives about it.⁴ A newsletter article that explains a pending bill and urges readers to call their senator qualifies. The same article without a call to action does not.

What Is Carved Out

Several categories of activity fall outside the lobbying definitions entirely, so money spent on them never hits your caps:

Nonpartisan analysis or research, meaning a report that presents information sufficient for readers to form their own conclusions, even if the report itself reaches one.
Technical assistance provided in response to a written request from a legislative committee or subcommittee, so long as the response goes to the full requesting body.
Broad discussions of social or economic problems that do not reference specific legislation or urge action on a bill.

There is also a self-defense exception. Communications with a legislative body about proposed action that would affect the organization’s existence, powers, tax-exempt status, or the deductibility of contributions to it do not count as direct lobbying expenditures.⁵ The organization can even initiate legislation on those subjects without triggering the caps. The exception does not cover proposed legislation that would merely affect the scope of your future activities or your funding. Testifying before an appropriations committee to preserve a contract your organization depends on financially does not qualify, because that affects revenue rather than fundamental existence or tax status.

How to Make the Election

Electing the expenditure test requires filing Form 5768, a single-page form. It asks for the organization’s legal name, mailing address, Employer Identification Number, and the beginning date of the tax year for which the election takes effect. An authorized officer signs it.⁶

Mail the completed form to the Department of the Treasury, Internal Revenue Service Center, Ogden, UT 84201-0027. You can file it at any point during the tax year you want the election to begin, though earlier is better for planning. Once filed, the election stays in effect for every subsequent tax year until you revoke it. No annual refiling is required.¹

Keep a copy of the signed form with your postmark receipt. That is your proof, in any future audit, that your organization is measured by dollar limits rather than the subjective substantial part standard.

Revoking the Election

If the expenditure test no longer serves the organization, you can revoke by filing another Form 5768 indicating a voluntary revocation. The revocation takes effect at the beginning of the first tax year after the year you file the notice, and the organization goes back to the substantial part test at that point.⁷ You can re-elect later, but the new election cannot take effect earlier than the tax year following the first year the revocation was effective. That means at least a one-year gap under the old test.

What Happens If You Go Over the Limits

Overspending triggers a 25% excise tax on the excess, payable on Form 4720. If an organization exceeds both its overall lobbying limit and its grassroots limit, the tax applies to whichever excess is larger, not both.³

A single year of overage is expensive but survivable. The real danger is a pattern. The statute uses “normally” to describe excess spending, which the regulations measure over a four-year window. If total lobbying expenditures across that window exceed 150% of the combined lobbying nontaxable amounts for those years, or if grassroots expenditures exceed 150% of the combined grassroots nontaxable amounts, the IRS revokes the organization’s 501(c)(3) status.¹

Revocation on those grounds carries a lasting consequence. Under Section 504, an organization that loses 501(c)(3) status because of excessive lobbying is permanently barred from requalifying as a 501(c)(4) social welfare organization.⁸ The organization cannot restructure and keep operating under a different tax category.

Reporting and Recordkeeping

Electing organizations report their lobbying spending on Schedule C (Form 990), Part II-A. The section requires you to separate grassroots lobbying expenditures, direct lobbying expenditures, and other exempt purpose expenditures, and to show the calculated nontaxable amounts for the year.⁹ Part II-A also holds the four-year averaging calculation, where you report data from the current year and the three preceding tax years to show whether the 150% ceiling has been crossed.

The IRS does not mandate a particular recordkeeping system, but it expects a reasonable and consistent method for tracking three categories of cost:

Staff time: the portion of salaries and benefits attributable to lobbying and lobbying preparation. Timesheets, incident report forms completed after each lobbying activity, or periodic questionnaires all work.
Direct costs: printing, postage, travel to legislators’ offices, consultant fees, and similar expenses tied to specific lobbying communications.
Overhead allocation: a share of rent, utilities, and other general operating expenses proportional to the staff time spent on lobbying.

Tracking starts when the primary purpose of preparation or research shifts to lobbying. If staff begin drafting testimony specifically intended for a legislative hearing, the preparation time counts from that point. Research that starts as general policy analysis and later gets repurposed is trickier, but the primary purpose standard means you measure from the moment lobbying becomes the main goal, not from the first hour of research.

1
Office of the Law Revision Counsel. 26 USC 501 – Exemption From Tax on Corporations, Certain Trusts, Etc.
2
Internal Revenue Service. Measuring Lobbying Activity: Expenditure Test
3
Office of the Law Revision Counsel. 26 USC 4911 – Tax on Excess Expenditures to Influence Legislation
4
Internal Revenue Service. Direct and Grass Roots Lobbying
5
Internal Revenue Service. Lobbying Issues (1997 EO CPE Text)
6
Internal Revenue Service. Form 5768 (Rev. September 2016)
7
eCFR. 26 CFR 1.501(h)-2 – Electing the Expenditure Test
8
Office of the Law Revision Counsel. 26 USC 504 – Status After Organization Ceases to Qualify for Exemption Under Section 501(c)(3) Because of Substantial Lobbying or Because of Political Activities
9
Internal Revenue Service. Instructions for Schedule C (Form 990)