The Tax Cuts and Jobs Act (TCJA) amended the Internal Revenue Code definition of nondeductible lobbying expenses by removing the exception for amounts related to local legislation. This definitional shift is especially important for exempt organizations and, combined with others found in the new law, the provision will have varying effects on the activities and taxability of exempt organizations. This article will cover the effect of this change as it relates to an exempt organization’s tax liability and reporting requirements.
Deductible Lobbying Expenditures
According to Section 162(e), amounts paid or incurred in connection with influencing legislation may not be deducted as a business expense. Prior to the TCJA’s enactment, lobbying expenses at the local level—which includes Indian Tribal governments—were exempt from this disallowance. Effective December 22, 2017, the new law repealed this exception for lobbying expenses related to local legislation. Any amounts paid or incurred related to local lobbying expenses after this date are no longer deductible.
Chambers of commerce, business leagues, real estate boards, boards of trade and professional football leagues are exempt from federal income taxation under §501(c)(6) if they’re organized for nonprofit purposes. While the requirement to report amounts paid for lobbying expenses also applies to §501(c)(4) and §501(c)(5) organizations, entities organized under §501(c)(6) frequently engage in lobbying activities and must report to their members the portion of nondeductible dues paid related to lobbying. In lieu of reporting these amounts to members, an association may elect to pay a proxy tax at the entity level on its lobbying expenditures. If an entity takes the proxy tax route, it must file Form 990-T, Exempt Organization Business Income Tax Return (and proxy tax under section 6033(e)) and pay any associated tax due.
The broadened definition of nondeductible lobbying expenses may have a significant effect on entities with lobbying activities that solely pertain to local legislation. The new law would require these associations to start tracking expenses related to local lobbying and either provide this information to their members or report this information on Form 990-T. If an organization’s sole reason for filing Form 990-T is to report its proxy tax, it may not be required to complete all sections of the form; however, the organization still must consider the additional filing requirements and costs required to gather information, perform the proxy tax calculation and file the form.
Associations with other nonlocal lobbying activities may not experience a similar shock since they’re already accustomed to tracking and reporting these activities. In addition, an association that chooses to report its lobbying expenses on Form 990-T and pay the proxy tax will be subject to the new, lower corporate tax rate of 21 percent, versus the maximum 35 percent under previous law.
Some associations may have provided the nondeductible dues notification to their members for 2018 prior to the change in tax law. These associations have the option to either pay the proxy tax on the difference between the amount communicated and the actual expenses under the new law or, elect to carry forward the excess amount to be included in next year’s calculation. The election to carry forward the excess isn’t automatic. The IRS has discretion over whether it will allow an association to carry forward the excess lobbying or pay the proxy tax. The IRS will consider the facts surrounding the reasonable estimates in allowing this exception to paying the proxy tax. Associations use Schedule C of the Form 990 to provide additional information on their lobbying activities.
There isn’t a requirement for organizations exempt from tax under §501(c)(3) to report the percentage of membership dues allocable to lobbying or pay a proxy tax. However, this is only the case because such entities aren’t allowed to devote a substantial part of their activities to lobbying. The IRS considers several factors when determining if an organization meets the “substantial part” test, including time and expenses incurred related to lobbying. If an organization doesn’t meet the test, its tax-exempt status could be compromised. Similar to the issues faced by associations discussed above, 501(c)(3) organizations will need to reassess their current lobbying activities and determine if the inclusion of lobbying for local legislation pushes them over the substantial part threshold.
For more information on the new law, visit BKD’s Tax Reform Resource Center. If you have questions on how to comply with the reporting requirements under the new law, contact Julia or your trusted BKD advisor.