A provision of The Tax Cuts and Jobs Act (“TCJA”) includes local lobbying in the definition of lobbying for the first time. This provision has been seemingly ignored due to all of the other concerns over other provisions in TCJA which impact tax-exempt hospitals.
For tax-exempt hospitals and tax-exempt affiliates under Internal Revenue Code Section 501(c)(3), the new provision means that they will be required to take local legislative lobbying expenses (including the expenses of lobbying Indian tribal governments) into account in determining whether they meet either the “Substantial Part Test” or the “Expenditure Test”. The new provision is effective for amounts paid or accrued after the date of the TCJA’s enactment on December 22, 2017.
Substantial Part Test
Briefly, under the Substantial Part Test, a hospital that conducts excessive legislative lobbying in any taxable year can jeopardize its tax-exempt status, resulting in all of its income being subject to tax. In addition, hospitals and affiliates that lose their tax-exempt status due to excessive lobbying are subject to an excise tax equal to five percent of their total lobbying expenditures for the year in which they cease to qualify for exemption. Annual reporting of lobbying expenses under the Substantial Part Test by a charitable organization is done on Form 990, Schedule C, Political Campaign and Lobbying Activities For Organizations Exempt From Income Tax Under Section 501(c) and Section 527, Part II-B. Also, the costs of “lobbying” the public in support of or in opposition to local ballot initiatives and referenda must now be included in lobbying, as well.
Hospitals, as well as affiliated charitable organizations, with the exception of churches and private foundations, may elect the Expenditure Test under Internal Revenue Code Section 501(h) as an alternative method for measuring lobbying activity. Under the Expenditure Test, the extent of an organization’s lobbying activity will not jeopardize its tax-exempt status, provided its expenditures, related to such activity, do not normally exceed an amount specified in Internal Revenue Code Section 4911. This limit is, generally, based upon the size of the hospital and may not exceed $1,000,000; with the permitted amount for smaller organizations, those with “Exempt Purpose Expenditures” of $500,000 or less limited to 20% of Exempt Purpose Expenditures. Lower limitations with respect to grassroots lobbying, defined as attempting to influence legislation through communications attempting to influence the general public, exist.
Exempt Purpose Expenditures are, generally, defined as program services expenses, increased by administrative expenses allocable to program services, lobbying expenses, depreciation and amortization, as well as, the organization’ fundraising expenses.
Hospitals electing to use the Expenditure Test must initially file Form 5768, Election/Revocation of Election by an Eligible Internal Revenue Code Section 501(c)(3) Organization to Make Expenditures to Influence Legislation, at any time during the tax year for which it is to be effective. The election remains in effect for succeeding years unless it is revoked by the organization. Revocation of the election is effective beginning with the year following the year in which the revocation is filed. Annual reporting by an organization under the Expenditure Test is completed on Form 990, Schedule C, Political Campaign and Lobbying Activities For Organizations Exempt From Income Tax Under Section 501(c) and Section 527, Part II-A.
Members of an affiliated group are treated as a single organization when measuring lobbying expenditures. Two organizations are affiliated if one is bound by the other organization’s decisions on legislative issues (control) or if enough representatives of one belonging to the other organization’s governing board to cause or prevent action on legislative issues (interlocking directorate). If the organization isn’t sure whether its group is affiliated, it may request a letter ruling from the Internal Revenue Service. There is a fee for this ruling.
With respect to both the Substantial Part Test and the Expenditure Test, hospitals must be careful to include on Form 990, Schedule C, both direct and indirect lobbying costs, including costs incurred by associations to which hospitals belong. Examples of such organizations are industry associations and chambers of commerce. Even, if the association or chamber of commerce does not report the portion of a hospital’s dues which are used for lobbying, the hospital is required to report the lobbying portion of dues paid on its form 990. Also, the costs of “lobbying” the public in support of or in opposition to local ballot initiatives and referenda must now be included in lobbying, as well.
Hospitals must, after December 22, 2017, take local lobbying expenses into account with respect to the reporting of lobbying expenditures on Form 990.