Erika K. Lunder
Legislative Attorney
As the 2012 election cycle heats up, one question often asked is whether businesses may deduct amounts spent on political activities as a business expense. A related question is whether they may deduct dues paid to a 501(c)(6) trade association that then engages in such activities. These questions have greater significance in light of the Supreme Court’s 2010 decision in Citizens United v. FEC, which struck down long-standing prohibitions in federal campaign finance law on corporations making certain types of campaign-related expenditures.
Section 162(e) of the Internal Revenue Code (IRC) generally prohibits corporations from deducting as a business expense the types of expenditures that they can now make post-Citizens United. The statute, which long predates the 2010 decision, prohibits taxpayers from deducting campaign-related and lobbying expenditures as a trade or business expense.
With respect to dues, the IRC generally permits a 501(c)(6) trade association to decide whether to notify its members of the portion of dues that are allocated to political activities and, therefore, not deductible. If the group provides the notification, then its members may not deduct that portion of the dues. If the group chooses not to provide the notification, or otherwise fails to do so, then it must generally pay a tax (known as a “proxy tax”) on that amount. The notification and proxy tax requirements do not apply to any amount on which the 501(c)(6) organization is taxed under IRC Section 527(f). That section imposes a tax on 501(c) organizations that make an expenditure for influencing elections, among other activities.
Contributions to other types of tax-exempt groups that use the money for campaign activity would appear to be non-deductible under Section 162(e). It seems that donations to a Section 527 political organization engaged in electioneering, such as a political action committee (PAC, including a Super PAC), should not be deducted. The tax treatment of contributions to politically active 501(c) groups (e.g., 501(c)(4) organizations) may be a little more complicated, but it does appear that any amounts for campaign activity or lobbying should be non-deductible under Section 162(e). Nonetheless, some tax experts have recently suggested that businesses might be including some contributions to 501(c) groups in their marketing or advertising budgets and then deducting them as ordinary and necessary business expenses under Section 162. For anyone outside the IRS, determining whether this is actually happening would be very difficult, if not impossible, since the information is typically not publicly available.
Some have suggested that Citizens United calls into question the constitutionality of Section 162(e). The arguments appear to be that the tax code cannot disallow a deduction for activities that the Supreme Court has held are protected speech or provide beneficial tax treatment to only some types of speech (e.g., non-political business speech, the expenditures for which may be deductible). It is not clear this is true. Prior to Citizens United, the Supreme Court ruled that a regulatory provision similar to Section 162(e) was constitutional, explaining there is no requirement that the government subsidize a taxpayer’s First Amendment rights by permitting a deduction for political expenditures. It is not at all clear that Citizens United changes this analysis. Therefore, until a court speaks to the issue, it seems premature to conclude that Section 162(e) is unconstitutional based on Citizens United.
Date of Report: August 22, 2012
Number of Pages: 10
Order Number: R42381
Price: $29.95
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