If you’re like most people in the U.S., Tuesday, November 6, and an end to the almost nonstop election coverage, can’t come fast enough. However, if you or your company has contributed to a campaign or political party, it pays to be aware of the tax consequences.
With limited exceptions, Section 162(e) of the Internal Revenue Code denies tax deductions for contributions made in connection with: influencing legislation; participating or intervening in any political campaign on behalf of (or in opposition to) any candidate for public office; attempting to influence the general public, or segments thereof, with respect to elections, legislative matters, or referendums; or any direct communication with a covered executive branch official in an attempt to influence the official actions or positions of such official.
Taxpayers also can’t deduct dues (or the portion of dues) or other amounts they pay to tax exempt organizations, and which then are used for lobbying purposes. IRS Publication 526 outlines contributions that are and aren’t deductible as charitable contributions. In the “not” column: donations to groups whose purpose is to lobby for law changes and political groups and candidates for public office.
What about organizations, such as professional or trade groups, with several missions, including political ones? Here, the portion of dues used for the purpose of influencing legislation can’t be deducted.
While donations to 501(c)(3) charitable organizations are deductible, these organizations generally aren’t allowed to engage in political campaigns, or have a substantial part of their activities consist of efforts to influence proposed or current legislation, as this September 2012 article in the Journal of Accountancy makes clear.
Of course, some taxpayers look for ways around these restrictions. One way has been through 501(c)(4) organizations; for the most part, this includes what typically are considered civic leagues and social welfare groups. Groups with 501(c)(4) status are tax exempt. However, some 501(c)(4) groups have indirectly been providing financial support to political candidates or causes, according to another article in the Journal of Accountancy.
The IRS sounds less than thrilled with this. In a July 2012 letter about the rules surrounding political activities undertaken by 501(c)(4) groups, Lois Lerner, the IRS’ director of exempt organizations, stated that the IRS “would consider proposed changes in this area as we work with the IRS Office of Chief Counsel and the Treasury Department’s Office of Tax Policy to identify tax issues that should be addressed through regulations and other published guidance.” The letter was sent to Democracy 21; according to its website, Democracy 21 is a nonprofit, nonpartisan organization working to eliminate the undue influence of big money in American politics.
The IRS has its work cut out for it. According to a recent review of data from the Federal Election Commission, 501(c)(4) groups spent nearly $100 in the 2010 elections. That topped even the $65 million spent by so-called Super PACs. The findings are the result of a joint investigation by the Center for Public Integrity and the Center for Responsive Politics.