The Federal Lobbying Tax Law: A Summary and Overview for Associations
March 6, 2020
In 1993, Congress declared that taxpayers no longer will be allowed to deduct for federal income tax purposes the expenses that taxpayers incur when they engage in lobbying. Tax deductibility also is disallowed by this law for a portion of membership dues paid to trade, professional and similar membership associations if the associations engage in more than minimal amounts of lobbying. Set forth below are the key features of the law as applied to associations exempt from federal income tax under Internal Revenue Code Section 501(c)(6).
1. Nondeductibility of membership dues. A percentage of each member's dues is rendered nondeductible based on the relationship of the total dues and similar income of the association to the association's total lobbying expenditures as defined in the law and Treasury regulations. An association that incurs lobbying expenditures must advise members at the time of dues assessment or payment what portion of their dues is nondeductible, and it must annually report to the IRS regarding lobbying expenditures and dues nondeductibility. As an alternative to notifying members of dues nondeductibility, an association can pay at the end of the year a flat 21 percent proxy tax on its annual lobbying expenditures.
2. $2,000 in-house lobbying exception. The exception for minimal lobbying expenditures is narrowly tailored. It exempts associations from the dues nondeductibility (or proxy tax) provisions only if in-house lobbying expenditures are $2,000 or less annually (for example, labor and material costs but with no need to include a general overhead amount). Amounts paid to engage outside lobbyists or lawyers, dues or other payments made to other organizations that lobby, grassroots lobbying expenditures, political expenditures, and foreign lobbying expenditures do not qualify for this $2,000 exception; any amount of such expenditures triggers the dues nondeductibility (or proxy tax) provisions.
3. Determination of lobbying expenditures. The key to associations' compliance with the law is the determination of lobbying expenditures, which affects the amount of either members' dues nondeductibility or the proxy tax. The information necessary to make such determinations is set forth below in the form of a lobbying tax compliance guide for association employees.
4. "Paid" volunteers. The costs of "paid" volunteers to associations are allocated to whomever makes the payments. If the association pays the volunteers (such as reimbursing them for their travel and other expenses), the costs are attributed to the association. If the volunteers' employers pay them (such as for salaries as well as their expenses), the costs are attributable to the employers, not to the association.
5. Cost allocation methods. Treasury regulations provide detailed guidelines for allocating an association's costs to lobbying, including three illustrative, but not mandatory, cost allocation methods. Of particular note is a rule that staff time spent on lobbying activities may be considered zero if it is less than five percent of that person's overall time (although employees' direct contact lobbying time may not be apportioned to the five percent).
6. Dues and similar amounts. Once lobbying expenditures and the additional costs are determined, they are allocated to dues income from association members to determine the percentage of members' dues that are nondeductible, or, alternatively, they provide the basis for the 21 percent proxy tax. The IRS has offered these definitions with respect to dues and similar amounts to which lobbying expenditures are allocated:
- Annual dues: The amount an organization requires a person, family or entity to pay to be recognized by the organization as a member for an annual period.
- Similar amounts: (i) Voluntary payments made by persons, families or entities; (ii) assessments made by the organization to cover basic operating costs; and (iii) special assessments imposed by the organization to conduct lobbying activities. Note that voluntary payments are not limited to those from members, but special assessments are limited to those made for lobbying activities.
- Member: Not limited to those with voting rights in the organization.
7. Reporting to the IRS. An association must report annually to the IRS the total amount of lobbying expenditures and the total amount of dues and similar income to which the lobbying expenditures are allocable to determine dues nondeductibility. Lobbying expenditures incurred in a year are allocated against dues and similar income received during the same year. If lobbying expenditures exceed dues and similar income, the excess is carried forward to increase dues nondeductibility for future years.
8. Notification to members. In addition to IRS reporting, the association must advise members (and other contributors) of dues nondeductibility. The association must provide a notice to each person, family or entity making payments of dues or similar amounts at the time of assessment or payment (e.g., on the dues invoice, on a dues receipt) of the portion of the dues or similar amounts that the association reasonably estimates will be nondeductible due to lobbying expenditures. The notice must be in a conspicuous and easily recognizable format.
9. Underestimation and overestimation of lobbying expenditures. If the dues nondeductibility amount for which notice is provided proves to be too low, the association must pay the 21 percent proxy tax on the deficiency balance or seek IRS permission to carry forward the underestimated amount to future years' nondeductibility notices. With respect to overestimated lobbying expenditures, the legislative history to the lobbying tax law directs the Treasury Department to issue regulations governing the treatment of associations that incur actual lobbying expenditures below the estimated amount. To date, such regulations have not been proposed or issued.
10. Elective proxy tax. As an alternative to disclosing what portion of dues is nondeductible because of lobbying expenditures, the association may elect to pay a proxy tax on the total amount of its lobbying expenditures (up to the amount of dues and similar payments received by the association) during the year. Any excess of lobbying expenditures over dues and similar payments is carried forward to the next year. The proxy tax is payable at the highest corporate income tax rate of 21 percent and reportable on Form 990-T, otherwise used as a tax return for unrelated business income taxation.
For more information, contact the author at jtenenbaum@TenenbaumLegal.com.