A provision of The Tax Cuts and Jobs Act (“TCJA”) includes “local lobbying” in the definition of lobbying for the first time. This provision has been seemingly ignored due to many concerns over other provisions in TCJA which impact tax-exempt organizations. The inclusion of local lobbying costs in a tax-exempt organizations’ lobbying expenses presents an opportunity to both discuss the impact of the new rule and briefly review lobbying rules for charities, social welfare organizations, labor unions, and trade associations, as they apply to your organization.
In addition to mandating the inclusion of local lobbying cost in an organizations lobbying calculations, the TCJA “temporarily” repealed the miscellaneous itemized deduction for individuals, which allowed an individual to deduct union dues to the extent, when combined with other miscellaneous itemized deductions, exceed 2% of an individual’s or couple’s adjusted gross income (AGI). The temporary repeal is effective for individuals’ tax years 2018-2025.
For organizations that are tax-exempt under Internal Revenue Code (“IRC”) §§501(c)(3), (4), (5), or (6), the new provision means that these types of tax-exempt organizations will be required to take local lobbying expenses (including the expenses of lobbying Indian tribal governments) into account in determining whether they meet either the “Substantial Part Test” or the “Expenditure Test”. The new provision is effective for amounts paid or accrued after the date of the TCJA’s enactment on December 22, 2017.
Briefly, under the Substantial Part Test, a charitable organization that conducts excessive legislative lobbying in any taxable year can jeopardize its tax-exempt status, resulting in all of its income being subject to tax. In addition, charitable organizations and charitable affiliates that lose their tax-exempt status due to excessive lobbying are subject to an excise tax equal to five percent of their total lobbying expenditures for the year in which they cease to qualify for exemption. Annual reporting of lobbying expenses under the Substantial Part Test by a charitable organization is done on Form 990, Schedule C, Political Campaign and Lobbying Activities For Organizations Exempt From Income Tax Under Section 501(c) and Section 527, Part II-B. Also, the costs of “lobbying” the public in support of or in opposition to local ballot initiatives and referenda must now be included in lobbying, as well.
Private foundations, unlike other organizations exempt from tax under IRC §501(c)(3), are, generally, prohibited from lobbying and subject to the “Taxable Expenditures” excise tax under IRC §4945 for lobbying activities, unless the lobbying activities are subject to one of the following exceptions:
Organizations that are tax-exempt under IRC §501(c)(3), including affiliated charitable organizations with the exception of churches and private foundations (private foundations have more restrictive rules limiting lobbying activities), may elect the Expenditure Test under IRC §501(h) as an alternative method for measuring lobbying activity. Under the Expenditure Test, the extent of an organization’s lobbying activity will not jeopardize its tax-exempt status, provided its expenditures related to such activity do not normally exceed an amount specified in IRC §4911. This limit is, generally, based upon the size of the organization and may not exceed $1,000,000; with the permitted amount for smaller organizations, those with “Exempt Purpose Expenditures” of $500,000 or less, limited to 20% of Exempt Purpose Expenditures. Lower limitations with respect to grassroots lobbying, defined as attempting to influence legislation through communications attempting to influence the general public, exist.
Exempt Purpose Expenditures are generally defined as program services expenses, increased by administrative expenses allocable to program services, lobbying expenses, depreciation and amortization, as well as the organization’ fundraising expenses.
Charitable organizations electing to use the Expenditure Test must initially file Form 5768, Election/Revocation of Election by an Eligible Internal Revenue Code Section 501(c)(3) Organization to Make Expenditures to Influence Legislation, at any time during the tax year for which it is to be effective. The election remains in effect for succeeding years unless revoked by the organization. Revocation of the election is effective beginning with the year following the year in which the revocation is filed. A request for revocation is also done on Form 5768. Annual reporting by an organization under the Expenditure Test is completed on Form 990, Schedule C, Part II-A.
With respect to both the Substantial Part Test and the Expenditure Test, charitable organizations must be careful to include on Form 990, Schedule C, both direct and indirect lobbying costs, including costs incurred by associations to which charitable organizations belong. Examples of such organizations are industry associations and chambers of commerce. If the association or chamber of commerce does not report the lobbying portion of an organization’s dues which are used for lobbying, the tax-exempt organization is still required to report the lobbying portion of dues paid on its Form 990, Schedule C. Also, the costs of “lobbying” the public in support of or in opposition to local ballot initiatives and referenda must now be included in lobbying.
Members of an affiliated group are treated as a single organization when measuring lobbying expenditures. Two organizations are affiliated if one is bound by the other organization’s decisions on legislative issues (control) or if enough representatives of one belong to the other organization’s governing board to cause or prevent action on legislative issues (interlocking directorate). If the organization is unsure whether its group is affiliated, it may request a letter ruling from the Internal Revenue Service (“IRS”). There is a fee for this ruling.
Social Welfare Organizations, Labor Unions, and Trade Associations are subject to a proxy tax on nondeductible dues, those for which a social welfare organization, labor union and trade association, did not annually report to their members as nondeductible. The proxy tax, is reported on Form 990-T, Exempt Organization Business Income Tax Return (and proxy tax under IRC § 6033(e)), and is generally taxed at regular corporate income tax rates or 21% for corporations effective for tax years beginning after December 31, 2017.
An exception to the proxy tax exists for the following types of organizations:
For those types of organizations listed above whose lobbying and political expenditures consist solely of in-house lobbying expenditures not exceeding $2,000 or who can establish, to the satisfaction of the IRS, that substantially all the dues or similar amounts received are not deducted by its members as business expenses.
The following additional exceptions to the proxy tax exist:
Note that the Form 990 disclosure of Social Welfare Organizations, Labor Unions, Agricultural and Horticultural Organizations and Trade Association lobbying expenses is more limited compared to that of charitable organizations and is limited to reporting on Form 990, Schedule C, Parts III-A and III-B, as required.
Local lobbying expenditures incurred after December 22, 2017 must be included in the lobbying cost calculations for all tax-exempt organizations. For publicly supported charities, the local lobbying costs must be included with federal and state lobbying costs under both the Substantial Part Test and the Expenditure Test; whichever is applicable, on Form 990, Schedule C. Both direct and indirect local lobbying costs must be captured, including costs incurred by trade and industry associations and chambers of commerce to which organizations belong. As outlined above, if an association, such as a trade association or chamber of commerce does not report the portion of a charitable organization’s dues which are used for lobbying due to one of the exceptions for paying proxy tax, the charitable organization is still required to report the lobbying portion of dues paid on its Form 990, Schedule C. In addition, local lobbying, including the costs of “lobbying” the public in support of or in opposition to local ballot initiatives and referenda, must now also be included in total lobbying expense calculations. Charitable Organizations that have not previously elected to use the Expenditure Test rather than the Substantial Part Test should consider making the Expenditure Test Election by filing Form 5768, in light of the inclusion of local lobbying costs in their annual lobbying calculations.
Tax-exempt Social Welfare Organizations, Labor Unions, Trade Associations, and Agricultural and Horticultural Organizations must now include local lobbying costs reflected in membership dues notice disclosures and complete Form 990, Schedule C, Parts III-A and III-B, as applicable, while Labor Unions not providing dues notice disclosures should not have any proxy tax liability prospectively, due to the inability of members to itemize deductions from 2018-2025. Social Welfare Organizations, Trade Associations, and Agricultural and Horticultural Organizations may benefit from the new 21% corporate tax rate in computing proxy tax on Form 990-T; if applicable.
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