Coping with the Lobbying Deduction Disallowance

Article excerpt

Lobbying expenses no longer are deductible for most entities.

Businesses, trade associations and others that lobby the government at the federal or state level are wrestling with implementation issues arising from a provision in the Omnibus Budget Reconciliation Act of 1993 denying deductions for lobbying expenses.

Revised Internal Revenue Code section 162(e) provides that expenses paid or incurred after December 31, 1993, to influence legislation and certain regulatory matters are not deductible. For businesses, compliance with the new law effectively requires establishing a system to capture information that will allow them to determine direct and indirect lobbying costs.

Under a proposed revenue procedure, the Internal Revenue Service would have section 162(e) apply also to trade associations and social welfare organizations, as well as to agricultural and horticultural organizations. Section 162(e) would not apply to other exempt organizations, such as country clubs or labor unions. Affected tax-exempt organizations face the same compliance issues as businesses, as well as the additional question of whether to pay taxes on lobbying expenses or pass the deduction disallowance on to members, if possible.

The IRS provided some guidance on the lobbying deduction disallowance, but fundamental questions remain, including a definition of lobbying itself. Two sets of regulations already have been proposed. One covers the deductibility of dues paid in 1993 to trade associations and other tax-exempt organizations that lobby; the other focuses primarily on safe-harbor methods for allocating expenses to lobbying activities. Additional guidance to define more clearly the types of lobbying activities for which deductions will be disallowed is expected later in 1994.

LOBBYING ACTIVITIES ARE ...

Complying with the new law requires lobbying activities to be identified. Section 162(e) says lobbying includes any attempt to influence legislation through communication with a member or employee of a federal or state legislative body or with a federal or state government official or employee who may participate in the formulation of legislation. Legislation includes acts, bills, resolutions or similar matters as well as proposals not yet in legislative form.

To be considered lobbying, a contact must refer to legislation or a legislative proposal and reflect a view on that legislation. Typical examples are meetings, telephone discussions and correspondence as well as planning, research and other preparation or coordination related to lobbying activities. It's not clear if a communication that does not reflect a view will constitute lobbying. Meetings for which lobbying is not a "substantial purpose," however, are not considered lobbying according to proposed IRS regulations. One example might be a widely attended meeting at which a legislator gives a speech.

For purposes of section 162(e), lobbying includes attempts to influence any nonlegislative action of high-ranking federal government officials known as "covered executive branch officials." This group is limited to the president, the vice-president, cabinet-level appointees, certain White House personnel and their immediate deputies. Costs incurred in activities aimed at influencing state officials' or lower level federal bureaucrats' nonlegislative actions remain deductible.

Special rules are anticipated for "monitoring" activities. Monitoring legislation, when there is no current attempt to influence its formulation or enactment, is not treated as lobbying under the new law. However, when monitoring later is followed by an attempt to influence the formulation or enactment of the same or similar legislation, earlier monitoring costs may be recharacterized as nondeductible lobbying expenses. Future IRS guidance is expected to prescribe the reach of this "lookback" rule. Regulations also will need to define what types of activities constitute monitoring. …