Federal Tax Aspects of Political Organizations

By Fiore, Nicholas | Journal of Accountancy, February 1999 | Go to article overview

Federal Tax Aspects of Political Organizations


Fiore, Nicholas, Journal of Accountancy


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.

POLITICAL ORGANIZATIONS

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 incumbent's 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. …

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