What is a 501(h) Election for Nonprofits (and Why It Matters)

When nonprofits think about advocacy, they often get nervous. “We can’t lobby, we’ll lose our tax-exempt status!” That’s one of the most common myths out there. The truth: nonprofits can lobby. In fact, lawmakers expect nonprofits to weigh in on policies that impact the communities they serve.

The tricky part is knowing how much lobbying you can do. That’s where the 501(h) election comes in.

The Old Way: The Substantial Part Test

Before the 501(h) option, all nonprofits were judged under what’s called the substantial part test. This rule basically says a nonprofit can lobby as long as lobbying isn’t a “substantial part” of its overall activities.

Here’s the catch:

• “Substantial” is not defined by the IRS, which makes it vague and unpredictable

• The test looks at both money and time spent on lobbying (so staff hours as well as expenses count)

• If the IRS decides lobbying was “too much,” a nonprofit could risk penalties or even its tax-exempt status

That uncertainty has caused many nonprofits to avoid lobbying altogether, even when it is part of their mission.

The New Way: The 501(h) Election

The 501(h) election gives nonprofits an alternative. Instead of vague rules, you get clear, dollar-based limits on lobbying tied to your budget size.

In simple terms, if you elect 501(h):

• You get clear caps on how much you can spend on lobbying each year

• Direct lobbying and grassroots lobbying are treated separately

• Stay under the caps, and you’re safe

For many nonprofits, filing the 501(h) election is the difference between tiptoeing around advocacy and confidently speaking up for your mission.

Why Should You Care?

• It provides clarity: no guessing about what “substantial” means

• It provides protection: clear IRS standards mean less risk

• It provides freedom: you can plan and budget your advocacy work without second-guessing yourself

The election itself is simple. Just file Form 5768 with the IRS. There’s no fee, and you can revoke it later if you choose.

(For more on this, check out my Kelpful information newsletter where I dive into how nonprofits can get political without losing their status.)

One Important Disclaimer

Now, here’s the part where I have to be crystal clear: I am not a bookkeeper or accountant, and I don’t play one on TV.

What I do is help nonprofits understand the legal landscape so they can make informed choices. But when it comes to how this plays out in your books, financial statements, or annual tax filings? That’s where you want to loop in your accountant or bookkeeper.

Think of me as your guide to the map, but you still need the right people in the car with you to drive safely.

Key Takeaway

If your nonprofit does any amount of advocacy, the 501(h) election is worth considering. It’s quick, it’s free, and it could make your life a lot easier. Talk to your accountant about whether it makes sense for your organization, and don’t be afraid to use your voice, because your community deserves to be heard.