Tax Reform Yields Unexpected Benefit for Organizations Engaged in Lobbying and Political Activities

Tax Benefits April 9, 2018 By: J. Calvin Marks

The new tax law creates certain benefits for associations that partake in lobbying and political activities this year. Here’s what you need to know.

The Tax Cuts and Jobs Act of 2017 eliminated the graduated corporate tax rate brackets and set the corporate income tax rate at a flat 21 percent for tax years beginning after December 31, 2017.

For exempt organizations with unrelated business income, this provision will obviously change the calculation of their tax liability for 2018 and beyond. The new flat-rate structure will represent a tax increase for organizations with smaller unrelated business activities, and a tax cut for organizations with larger net taxable incomes.

But the change in the corporate tax rate will also have some unexpected changes on associations and organizations engaged in lobbying activities (defined as activities meant to influence the lawmaking process by appealing to currently elected legislators) or political activities (defined as activities meant to influence the electoral process by appealing to the voters).

Under Section 6033(e), exempt organizations other than 501(c)(3) organizations must notify their members of the estimated amount of dues payments which are allocated to lobbying activities and are therefore nondeductible as ordinary business expenses to the member.

Organizations may elect not to provide these notices and instead pay a tax (commonly called “proxy tax”) on the amount of lobbying expenditures. The amount of tax is determined with respect to the highest corporate tax rate.

This rate was 35 percent for tax years 2017 and prior (the rate for the top corporate tax bracket) but will be 21 percent for tax years beginning after December 31, 2017. This represents a significant tax cut for organizations which elect to pay proxy tax on lobbying expenditures and allow their members a full deduction for their dues payments. The new tax rate may change the analysis for organizations that currently disallow a portion of their member dues payments.

The new and lower rate comes at an extremely fortuitous time for organizations with significant lobbying or political activities, taking effect during an important midterm election year when political activities may increase sharply.

To illustrate the analysis, let’s imagine a 501(c)(6) trade association with $3 million in revenue from member dues. It spends $250,000 on lobbying, and communicates to members that 10 percent of their dues payments should be nondeductible. In 2017, this organization’s members would collectively pay an additional $105,000 in income tax due to the nondeductible dues notice if we assume that the members are corporate taxpayers subject to the top 35 percent tax rate (i.e., $3,000,000 dues x 10 percent nondeductible = $300,000 x 35 percent tax rate = $105,000 additional tax).

Under the same conditions, that same organization could instead pay just $52,500 in proxy tax for 2018 (i.e., $250,000 lobbying expenses x 21 percent tax rate), half the total economic cost of nondeductible dues in the prior year, and $35,000 less than $87,500 paid in proxy tax in 2017.

Similarly, exempt organizations making political contributions and other political expenditures, including political action committees and organizations maintaining other forms of segregated funds, are subject to tax on those political expenditures under Section 527(b). The rate of tax also references the top corporate tax rate, formerly 35 percent but now reduced to 21 percent.

The change in these tax rates represents a significant reduction in the total economic cost of lobbying and political activities for 501(c)(4), (5), and (6) organizations. Unlike 501(c)(3) organizations which are limited to conducting only an “insubstantial” amount of lobbying and are prohibited from conducting any political activities, these organizations have no specific restrictions on the amount of lobbying or political activities they may conduct and are limited only by the proxy tax or the nondeducibility of dues to their members.

The new and lower rate comes at an extremely fortuitous time for organizations with significant lobbying or political activities, taking effect during an important midterm election year when political activities may increase sharply.

Unlike the tax on unrelated business income, the taxes on lobbying and political activities were always imposed at a flat rate, so the tax rate change will result in a tax cut for organizations of all sizes. It is important to note that the taxes on lobbying and on political activities are excise taxes, not income taxes, and therefore do not require organizations to make quarterly estimated payments on these tax liabilities. Also, these taxes do not generally trigger tax at the state level in states where an organization may have nexus.


J. Calvin Marks

J. Calvin Marks, CPA, EA, is a manager at Johnson Lambert, LLP, in Raleigh, North Carolina.