CPAs active in the political process face a maze of laws and limitations. Among them are the IRC provisions dealing with the tax treatment of political expenditures used for the election of public officials at any level.
A political organization, whose structure may be either formal or informal, is created when its sponsors notify the federal, state or local government they have formed such an entity. It must operate primarily to accept contributions or spend money to (or attempt to) influence the selection, nomination, election or appointment of anyone to a federal, state or local public office or to an office in a political entity.
A political organization need not engage exclusively in exempt activities. It may sponsor nonpartisan educational workshops (as long as they are not intended to influence the selection, nomination, election or appointment of a person for public office), pay an incumbents office expenses or carry on social activities unrelated to its exempt function.
Typically, three types of organizations are involved in receiving and spending political funds: candidate committees, political action committees (PACs) and political party organizations.
PACs. These entities include separate segregated funds, which usually are established by exempt social welfare organizations, trade associations and business leagues. (Exempt organizations formed for charitable, educational or religious purposes may not establish such funds or intervene in political campaigns.) Unions, corporations and membership organizations can support candidates by using segregated funds for administrative costs and limited fundraising. Those entities also are referred to as PACs. In addition, multiple-candidate political organizations (known as nonconnected organizations), often formed by individuals or groups of individuals, are considered PACs.
TAXATION OF POLITICAL ORGANIZATIONS
Exempt function income. In calculating taxable income, a political organization, which pays income tax at the highest applicable corporate rate, excludes exempt function income and related deductions. Exempt function income covers contributions of money or other property; membership dues, fees or assessments; and the proceeds from a political fundraising or entertainment event or from the sale of political campaign materials, which are not received in the ordinary course of a trade or business. Whether an activity is a trade or business depends on several factors, including the activitys frequency, the manner in which it is conducted and the length of time it is carried out.
To qualify as exempt function income, the amounts must be segregated and used for an exempt function. This means more than merely separate bookkeeping entries; the assets themselves must be segregated. If an entity loses segregated fund status for an exempt function fund, it is subject to the general rules that apply to income and expenses. In addition, the amounts not spent on exempt functions may be included in the candidates personal income.
Exempt function expenses. Exempt function expenses may be both direct and indirect. Direct expenses include payments made on behalf of a candidate in furtherance of his or her quest for public office, including testing the waters expenses to determine whether to pursue a particular public office. Examples include media consulting and purchases, campaign commercial production, campaign staff and transportation expenses. Generally, when an organization supports an individuals campaign for public office, the activities and expenses are for an exempt purpose. Indirect expenses include fundraising, recordkeeping (including legal and accounting services related to the campaign and organization) and overhead (rent, utilities and telephone).
For a detailed discussion of the issues in this area, see Federal Taxation of the Political Process, by Kip Dellinger, in the February 1999 issue of The Tax Adviser .
Nicholas Fiore, editor
The Tax Adviser