Nonprofit Regulatory Compliance Checklist

Rule 1: No Political Campaign Intervention, at All

Section 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of, or in opposition to, any candidate for elective public office, according to the IRS. This covers obvious actions like campaign contributions or public endorsements, but also more subtle activity, such as a public statement made on the organization's behalf favoring a candidate. Nonpartisan activities, like voter education forums or voter registration drives conducted without bias toward any candidate, are permitted, but the line between nonpartisan education and prohibited intervention is a frequent source of violations. Violating this rule can mean denial or revocation of tax-exempt status and excise taxes, per the IRS.

Rule 2: Lobbying Is Limited, Not Banned

Unlike political campaign activity, lobbying, attempting to influence legislation, is allowed for a 501(c)(3) organization, but only up to a limit. By default, an organization is subject to the "substantial part" test: no substantial part of its activities may consist of carrying on propaganda or otherwise attempting to influence legislation, a standard the IRS evaluates using both the amount spent on lobbying and qualitative factors, such as staff and volunteer time. An organization can instead file Form 5768 to make the 501(h) election, which replaces the subjective substantial-part test with a defined expenditure test, a specific percentage of exempt-purpose expenditures, up to a set dollar cap for larger organizations, that's easier to track and plan around.

Rule 3: Unrelated Business Income Has Its Own Tax

A tax-exempt organization can conduct some activity unrelated to its exempt purpose, but income from a trade or business that's regularly carried on and not substantially related to the organization's exempt purpose is subject to unrelated business income tax. An organization with $1,000 or more of gross income from this kind of activity must file Form 990-T, separate from its regular Form 990, and may owe tax on that income, according to the IRS.

Rule 4: No Private Inurement or Excess Benefit to Insiders

A tax-exempt organization's net earnings can't benefit a private individual, particularly an officer, director, or other insider with significant influence over the organization. Paying an insider more than reasonable compensation, or otherwise letting an insider benefit improperly from the organization's assets, is called an excess benefit transaction, and it carries its own excise tax on the individual who received the excess benefit, and sometimes on organization managers who approved it, under the intermediate sanctions rules. In egregious cases, the IRS can revoke the organization's tax-exempt status entirely on top of the excise taxes.

Rule 5: Governance Practices Support, but Don't Replace, These Rules

A conflict-of-interest policy, documented board approval of executive compensation using comparable data, and clear board minutes don't eliminate the rules above, but they're what the IRS looks at as evidence that an organization is taking its compliance obligations seriously, including on Form 990 itself, which asks specific governance questions.

Rule 6: These Rules Sit on Top of Filing and Registration Requirements

The political activity, lobbying, UBIT, and private inurement rules above are substantive restrictions on what a nonprofit can do; they're separate from the procedural filing requirements, the annual Form 990 and state charitable solicitation registration, covered in how to maintain nonprofit compliance. A nonprofit needs to satisfy both sets of requirements, not just one.

Building This Into Board Oversight

Because several of these rules carry penalties that fall on individual officers, directors, or managers personally, not just the organization, it's worth making sure your board specifically understands the political activity ban, the lobbying election decision, and the compensation-approval process, rather than treating these as back-office compliance details that only staff need to track.

The Political Activity Line Gets Crossed Unintentionally More Often Than Deliberately

Most violations of the political campaign ban aren't a deliberate decision to endorse a candidate; they're a staff member or board member speaking at an event, or a newsletter item, that reads as favoring one candidate over another without the organization intending it that way. Review anything public-facing around elections with this rule specifically in mind.

The 501(h) Election Is Worth Considering Early, Not After a Lobbying Question Arises

Because the substantial-part test is subjective and the 501(h) expenditure test is a clear, calculable limit, many organizations that do any meaningful amount of advocacy work find the election easier to comply with predictably. Evaluate this before you're already deep into a lobbying campaign and unsure whether it's "substantial."

Compensation Decisions Need Documentation, Not Just Good Intentions

Paying a reasonable salary isn't enough on its own to avoid an excess benefit transaction question; the IRS looks at whether the organization followed a specific process, independent board approval and comparable compensation data, when setting it. Document the process, not just the final number.

This Is Not Legal or Tax Advice

Whether specific activity crosses into prohibited political intervention, how to calculate lobbying expenditures, and how unrelated business income applies to a specific revenue stream are fact-specific questions. Talk to a nonprofit attorney or accountant before a major advocacy campaign, a new revenue-generating activity, or a significant compensation decision involving an insider.