Choosing the Right Path for Association Political Engagement

Many non-profit organizations are strictly prohibited from participating in political campaigns.  However, Associations have significant leeway to engage in certain advocacy and political activities. This "broader latitude" does not mean "unlimited freedom." Navigating the legal boundaries of political activity for an Association requires careful compliance with IRS regulations to avoid taxes on political expenditures, deficiencies in reporting and disclosure requirements, or, in extreme cases, the loss of tax-exempt status.

Understanding Your Association’s Tax-Exempt Status

Associations tend to be exempt from income tax under one of the sections of the Internal Revenue Code (the Code) listed below. Our focus here is on these types of organizations.

IRC 501(c)(5) – Labor, Agriculture, and Horticultural Organizations (for example, an association related to the poultry or cattle industry)

IRC 501(c)(6) – Business Leagues (for example, a chamber of commerce or society of certified public accountants)

Defining Political Activities and Determining the Scope of Those Activities

Although lobbying and political activities are similar in many respects, the Internal Revenue Code clearly distinguishes between the two. The type of political activity discussed here is defined in Section 527(e)(2) as “influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any state or local public office, or office in a political organization, whether or not such individual or electors are ultimately selected, nominated, elected, or appointed.” This activity is also referred to in Section 527 as an “exempt function.”

Our discussion here focuses on Qualified State or Local Political Organization (QSLPO) political activities (as defined in Section 527(e)(5)). It does not contemplate involvement in political activities with regard to federal elections. Involvement in federal elections triggers incremental compliance and disclosure requirements.

Choosing a Path

Associations that choose to get involved in QSLPO political activities typically choose one of the following paths to conduct these activities. Each carries potential tax consequences, disclosure requirements, and reporting requirements.

• An association simply makes exempt function expenditures to a political candidate (direct) or a political action committee (indirect)
• Association forms a political action committee (QSLPO PAC) that is exempt from tax under IRC 527 and a separately segregated fund (as defined in IRC 527(f)(3)).

When the Association Makes Exempt Function Expenditure (direct or indirect)

The Association simply cuts a check to the candidate, the candidate’s campaign, or to an affiliated or nonaffiliated QSLPO PCA.

Compliance

• Tax – the Association incurs an excise tax equal to the lesser of 1) the Association’s investment income for the tax year or 2) the amount of the exempt function expenditure times the federal marginal corporate income tax rate, currently 21%.  This tax is calculated and paid on Form 1120POL, U.S. Income Tax Return for Certain Political Organizations.
• Reporting and Disclosure – the Association may also be required to report certain information related to its political activities in its Form 990, Return of an Organization Exempt Income Tax, Schedule C, Political Campaign and Lobbying Activities, Part I.

Benefits

• No need for the formation and maintenance of a separate legal entity
• May work well for “one-time” political contributions

Concerns

• While political activities may be permitted for Associations, they must not be the primary activity of the Association. If these activities become too "substantial”, the IRS could revoke the Association’s tax-exempt status.

When Association Forms QSLPO PAC/Separately Segregated Fund

This approach often involves the formation of a separate legal entity.

Compliance

• Tax – the QSLPO PAC incurs an income tax equal to the QSLPO PAC’s income from investments for the tax year, less a specific deduction of $100, multiplied by the federal marginal corporate income tax rate, currently 21%.  This tax is calculated and paid on Form 1120POL, U.S. Income Tax Return for Certain Political Organizations. State income taxes may also be applicable.
• Reporting and Disclosure - the QSLPO PAC may also be required to file its own Form 990, Return of an Organization Exempt Income Tax, Schedule C, Political Campaign and Lobbying Activities, Part I.

Benefits

• Isolates the Association’s political activities to the QSLPO PAC, therefore, not endangering the Association’s tax-exempt status.
• The Association can solicit contributions to the QSLPO PAC or take advantage of a permitted “dues check-off” process to fund it.  Under the dues check-off process, with proper disclosures, the Association can collect contributions to the QSLPO PAC along with its member dues and then remit those contributions over to the QSLPO PAC to fund its political activities.

Concerns

1. The Association must ensure compliance with reporting and disclosure requirements and ensure timely remittance of contributions to the QSLPO PAC.
2. The Association must ensure proper management and administration of the QSLPO PAC.

In the Association environment, “political activities” are typically not seen as a negative. In fact, in many cases, members expect their Association to be actively involved in these political activities.  With proper planning and consideration, Associations can choose the path that best fits their organization and satisfies their objectives for supporting political campaigns.

Choosing the Right Approach for Your Association

Engaging in political activities while maintaining tax-exempt status requires thoughtful planning and a clear understanding of tax, reporting, and disclosure requirements. Whether your association is considering direct political expenditures or forming of a QSLPO PAC, proactive guidance can help reduce risk and support compliance. If you have questions about how these activities may affect your organization, contact your CRI advisor for guidance tailored to your goals and obligations.