Tax Reform Yields Unexpected Benefit for Organizations Engaged in Lobbying and Political Activities
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% 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.
But the change in the corporate tax rate will also have some unexpected changes on organizations that engage in lobbying activities — activities meant to influence the lawmaking process by appealing to currently-elected legislators — or political activities — 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 non-deductible 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 previously 35%, the top corporate tax rate bracket, but will now be 21%. This represents a significant tax cut for organizations who elect to pay Proxy Tax on lobbying expenditures and allow their members a full deduction for their dues payments, and it may change the analysis for organizations that currently disallow a portion of their member dues payments.
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% but now reduced to 21%.
It is important to note that both the 6033(e) and 527(b) taxes are excise taxes, not income taxes, and therefore do not require organizations to make quarterly estimated payments on these tax liabilities. These taxes also do not generally trigger tax at the state level, in states with which an organization may have nexus.
If you have any questions about your organization’s lobbying or political activities, or for more information on any of the provisions of the Tax Cuts and Jobs Act, please feel free to contact us.