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Blake E. Christian
Blake E. Christian

The tax and legal issues raised by political contributions

Political contribution rules are a minefield for businesses and individuals.

October 25, 2012
By Blake E. Christian, CPA

With 2012 being a critical presidential election year, we are all getting bombarded with television ads, mailers, emails, and personal requests for contributions from federal, state, and local politicians, political action committees (PACs), and backers of a record number of state propositions. As these campaigns reach their crescendos, the money continues to flood in at record levels. President Barack Obama’s campaign will likely reach a record billion dollars of fundraising by the end of the 2012 campaign.

Business owners, key executives, professional service firm partners/members, and other high-net-worth individuals represent a significant target pool for political donations; and the “ask” rate from the various campaigns has been at frenzied levels this year.

Some donors will investigate the legal and tax ramifications of these political donations before they give, but the majority of donors give first and ask questions later.

There are a few significant issues political donors need to be aware of as they remit and account for these contributions. Material legal ramifications and negative press for the donor and the campaign can result if these complex rules are violated—even inadvertently.

Following are the key issues:

Legal issues

Under the Federal Campaign Finance Law, there are strict limits on who can contribute to candidates for federal office and annual dollar limits per candidate or campaign. “Contributions” are defined as “anything of value given to influence a federal election.” This can include cash, food, beverages, entertainment, lodging, office supplies, printing or other advertising services, furniture, etc. However, volunteering the donor’s personal services is not treated as a contribution.

The following individuals and businesses are precluded from contributing to federal candidates:

Foreign nationals. Other than foreign citizens who have permanent U.S. residency (green card holders).

Federal contractors. Individuals and businesses that have contracts to supply goods or services to the federal government.

Corporations and labor unions. All for-profit and not-for-profit incorporated entities are prohibited from making direct contributions to federal candidates out of business accounts or through business charge cards. As discussed below, contributions to PACs can be made through a business account.

Contributions in the name of another person. Although often tried, businesses and individuals cannot circumvent these rules by funding payments through another person. However, children under 18 may contribute if they use their own funds and are under no duress from their parents.

Note that cash contributions are limited to $100, and all others must generally be made via check, credit card, or debit card.

The federal dollar limits are summarized below:

Contribution Limits 2011–12

To each candidate or candidate committee per election

To national party committee per calendar year

To state, district &  local party committee per calendar year

To any other political committee per calendar year

Special limits

Individual
may give

$2,500*

$30,800*

$10,000 (combined limit)

$5,000

$117,000* overall biennial limit:

  • $46,200* to all candidates
  • $70,800* to all PACs and parties

National party committee
may give

$5,000

No limit

No limit

$5,000

$43,100* to Senate candidate per campaign

State, district & local party committee
may give

$5,000 (combined limit)

No limit

No limit

$5,000

No limit

PAC (multicandidate)
may give

$5,000

$15,000

$5,000 (combined limit)

$5,000

No limit

PAC
(not multicandidate) may give

$2,500*

$30,800*

$10,000 (combined limit)

$5,000

No limit

Authorized campaign committee may give

$2,000

No limit

No limit

$5,000

No limit

Source: www.fec.gov/pages/brochures/fecfeca.shtml#Contribution_Limits.

* These contribution limits are indexed for inflation.

 

Note that there are other giving opportunities (and complexities) in donating during both the “primary” and “general election” periods.

Donor limits for state and local races vary by state, and you should check with your secretary of state’s office for guidelines. The National Conference of State Legislatures website offers a starting point.

Tax consequences

As the political landscape unfolds in the coming weeks, the rise in political expenditures leaves many taxpayers with a question, “Are these donations deductible for tax purposes?” In the vast majority of cases, the answer is “no” because  Sec. 162(e) denies a deduction for any amount paid or incurred in connection with:

  • Influencing legislation;
  • Participation in, or intervention in, any political campaign on behalf of (or in opposition to) any candidate for public office;
  • Any attempt to influence the general public, or segments thereof, with respect to elections, legislative matters, or referendums; or
  • Any direct communication with a covered executive branch official (e.g., the president, vice president, cabinet members, and their deputies) in an attempt to influence the official actions or positions of that official.

While certain exceptions apply, the general rule is that there is no tax benefit associated with lobbying and political expenditures incurred. Both individuals and businesses have sought mechanisms to bypass these rules, often looking to politically focused organizations, such as PACs, as a means to influence legislation and political policy. However, the tax treatment of payments to PACs, and similar institutions, requires analysis as well.

History of political action committees

In 1947, as part of the Taft-Hartley Act, P.L. 80-101, Congress prohibited labor unions or corporations from spending money to influence federal elections, and prohibited labor unions from contributing to a candidate’s campaign. In an effort to influence political policy, corporations and labor unions formed private groups called PACs that were organized to elect or defeat government officials, as well as to promote legislation.

In 1974, amendments to the 1971 Federal Election Campaign Act (FECA), P.L. 92-225, defined how a PAC could operate, setting many of the contribution and operating limits referenced above.

In 2010, the U.S. Supreme Court, in Citizens United v. Federal Election Comm’n, 558 U.S. 310 (2010), held that laws prohibiting corporate and union political expenditures were unconstitutional. This ruling made it legal for corporations and unions to spend from their general treasuries to finance independent expenditures (e.g., with a donor directly underwriting political events, ads, videos, meals, and lodging, etc.), but the ruling did not alter the prohibition on direct corporate or union contributions to federal campaigns.

In addition to the formation of PACs, the formation of super PACs has influenced the political landscape. In contrast to PACs, super PACs have no legal limits on spending or donation amounts. However, whereas PACs can contribute directly to politicians or political parties, super PACs must spend dollars independently of the general campaign in support of (or against) a particular candidate or issue.

A taxpayer’s dilemma

Corporations, labor unions, and individuals face a similar dilemma—the desire to contribute dollars to support a particular political candidate versus the desire to limit their tax bill through the maximization of deductible donations. While many taxpayers are aware of the rule under Sec. 162(e) disallowing deductions for political donations made directly to candidates, taxpayers have found mechanisms to achieve both desires in the form of donations to nonprofit organizations. However, while certain nonprofit entities may engage in political activities, the tax treatment for the donor varies, depending on how these entities are organized to fulfill their goals.

Donations to public charities, defined as organizations operated for charitable, religious, educational, literary, scientific, etc., purposes are generally deductible. Public charities, however, are limited in their ability to influence political policy and legislation, as these organizations cannot support or oppose a particular candidate, but may work to educate the public on political initiatives. (For more on this, see Kelley and Roberts, “Ban on Political Activities: An Election-Year Warning for Charities,” Journal of Accountancy (September 2012).)

Social welfare groups (Sec. 501(c)(4) organizations), defined as organizations operated exclusively to promote social welfare (e.g., civic leagues and community associations), are not restricted in their ability to conduct lobbying to influence political policy and legislation, if the lobbying is related to their exempt purposes. A Sec. 501(c)(4) organization may also engage in political campaign activities if the activities are not its primary activity. However, donations to these organizations are generally not tax deductible.

Current events

In the wake of the uptick in polarized political activity, organizations have sought alternative means to raise dollars by incentivizing potential donors by highlighting the potential tax benefits. As an example, activist organizations such as “Occupy Wall Street” have received attention for offering donors the opportunity to influence political policy through direct contributions while receiving a tax benefit as well. These organizations, which are for-profit organizations and thus not subject to the laws governing nonprofit organizations, have formed alliances with nonprofit groups that collect donations on their behalf. These nonprofit groups then funnel the money to organizations that then support or oppose a particular political candidate or issue. This activity occurs on both sides of the political aisle.

The IRS is aware of these arrangements, and increased scrutiny from  federal and state authorities is expected. For example, in September, the IRS announced that it is considering changing the regulations that govern 501(c)(4) groups, and in May 2011 it announced that it was investigating whether donations made by five taxpayers to 501(c)(4) groups were subject to gift tax.

Another issue relates to the collection and disbursements of union dues. Under Sec. 162, union dues are generally deductible; however, the portion of dues used for lobbying efforts is not. Therefore, employees must get an accounting from their employer or union that bifurcates the dues into lobbying and nonlobbying portions to determine how much is deductible on their Schedule A as miscellaneous itemized deductions. As a practical matter, this information is often not voluntarily provided, and the employees may assume their entire union dues are tax-deductible. Sec. 6033(e)(2)(A) can impose a 35% excise tax on the union or other tax-exempt entities for failure to disclose the lobbying costs.

Conclusion

CFOs, controllers, boards of directors, and CPAs performing either audit or tax services should be familiar with these rules to ensure that financial statements and tax returns are accurate, and that shareholders and employees do not purposely or accidentally violate these rules. It is much better to flag these issues before the media does.

Please refer to IRS Publication 526, Charitable Contributions, for additional information about the tax treatment of political and charitable contributions.

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Blake E. Christian, CPA, is a tax partner in the Long Beach, Calif., office of Holthouse, Carlin & Van Trigt LLP (www.hcvt.com).