A Brief Look at Nondeductible Member Dues
Lobbying continues to be one of the most effective elements a trade association can utilize in creating systemic change; however, it can be a contentious topic, especially in election years. It is important to report lobbying expenses correctly on both your dues notices and Form 990 to ensure enhanced accountability and transparency.
In 1993, Congress passed a law that disallowed a tax deduction for lobbying expenses. Membership dues paid to a trade association can only be deducted to the extent the dues are not used for lobbying. Generally, nondeductible lobbying expenses include amounts paid or incurred to:
- influence legislation
- participate or intervene in political campaigns
- attempt to influence the general public related to elections, legislative matter, or referendums
- directly communicate with an official in an attempt to influence official actions
At the time dues are assessed, trade associations must provide a reasonable estimate of the portion of invoiced dues to be used for future lobbying expenses. Accurately estimating lobbying expenses, and thus nondeductible dues, is crucial. When filing Form 990, the estimated allocation of lobbying dues is reconciled against actual lobbying expenses incurred. Any difference between the two amounts is carried over to the following year. Inflated estimates lead to expenses being disallowed for your members and is typically represented by an ever-decreasing, and possibly negative, carryover. Conversely, low estimates could indicate lobbying expenses exceeding budgeted amounts. These carryover amounts should be understood and acknowledged when determining the changing estimate for each year. Estimation disparity will likely occur in the short-run; however, accuracy increases over time, leading to little deviation in the long-run.
Any “reasonable method” to estimate dues allocated to lobbying is permitted, as long as it is used consistently. However, the Internal Revenue Service provides examples of three methods: the ratio, gross-up and cost allocation methods. Whichever method is used, a trade association should be mindful to account for budgeted lobbying expenses paid to third parties, lobbying performed by compensated employees, and any carryover from previous years.
Some trade associations feel it is not in their best interest to pass the burden of nondeductible expenses to their membership. If management decides to forgo estimating dues allocated to lobbying, the organization will be required to pay a 35% proxy tax on lobbying expenses. Organizations must weigh the burden of nondeductible dues versus the need to maximize funds available for its intended mission. The exemption from the proxy tax often acts as an incentive to provide estimated nondeductible amounts to the membership.
The deductibility of lobbying expenses will be a lively discussion for years to come. With demands for campaign finance reform, future changes are conceivable. Please contact us to discuss any questions or a specific course of action.