Speaker 1:
From Carr Riggs & Ingram, this is It Figures, the CRI podcast, an accounting, advisory and industry focused podcast for business and organization leaders, entrepreneurs, and anyone who is looking to go beyond the status quo.
Phyllis Ingram:
Okay. Today we’re talking with Chad Singletary, our sub-line leader of associations, and we’ll be talking about lobbying activities of association groups. Hi, I’m Phyllis Ingram. I’m the partner in the Montgomery office and also the industry line leader over financial institutions and insurance. So we’ll start with Chad. And Chad, do you want to give your background and the topic information?
Chad Singletary:
Sure. Chad Singletary. I’m also a partner in the Montgomery office, primarily working in the not for-profit area and the insurance area. Serve as a sub-line leader for association groups. And today, Phyllis and I are going to chat a little bit about lobbying and specifically how lobbying activities impact certain not for-profit groups, specifically association groups. Kind of give you a feel for what they do when they lobby and what they have to deal with and compliance and how it originated and things of that nature. So Phyllis, if you want to get us started.
Phyllis Ingram:
Okay, good. Well, Chad, when and where do these limitations and disclosure requirements come into play for associations and/or PACS?
Chad Singletary:
Well, they’ve been around for quite some time. They actually started as a result of the Tax Act in 1993, specifically the Omnibus Budget Reconciliation Act of 1993. I always love how they come up with names for these big legislative packages. If you’re keeping score at home, that’s when Bill Clinton was in office in the early ’90s. This at the time was billed by Bill Clinton and the Democrats as a big deficit reduction tax package. So they were looking for money. And one of the things included there were a new set of rules, limitations, and disclosure requirements for lobbying activities of certain not for-profit organizations.
I look back at this and it’s kind of surprising that for the first time this act actually made lobbying expenditures not deductible for federal income tax purposes. So imagine that. Prior to this time, corporations could write a check for $100,000 for lobbying and deduct it for any income tax purposes. So you can imagine it stirred the waters a bit with this new act. At the time, the elimination of this deduction for lobbying was projected to save about $241 billion. So it’s pretty big bill. But let that sink in for a second. Lobbying expenditures were tax-deductible. I mean, that’s not logical to us today, so many years past that. The other thing that’s kind of surprising when I look back at this is that I was a first year staff accountant. I remember when the Tax Act came out and we had to learn about it in ’93.
So that really tells you how far back it goes. But that’s where it started. That’s where we got these requirements from.
Phyllis Ingram:
Oh, wow. Well, just for context, what nonprofit organizations do these rules apply to?
Chad Singletary:
Well, particularly, we refer to them as association groups. We call them groups because they tend to be a cluster of organizations together. So you find these groups often have a 501C3 entity, which is a educational or a charitable type organization. Think foundation, charitable foundation. And then you have three other code sections there that refer to these association group organizations, a 501C4 which is a social welfare organization. These days, C4s do a lot of grassroots lobbying in the public states. 501C5 which is sort of an agricultural or horticultural membership organization, think Cattlemen’s Association is a good example. And then 501C6 is which are probably the more popular of those three, which are business leagues and associations. You could think Chamber of Commerce would be a good example there, but it’s a pretty small… There are a lot of not for-profit groups in the code. These four is what this pertains to specifically.
Phyllis Ingram:
Okay, good. So when we talk about lobbying activities, can you define what that means and what exactly is included in that.
Chad Singletary:
Yeah, that’s very important to understand. So the code describes lobbying… I’m going to read this because it’s long. It describes lobbying and we don’t want to mis-cite the code. Attempting to influence legislation at the federal, state, or local level through a communication with a member or employee of a legislative body or with a government official or employee who may participate in formulating legislation. And then if you do what I do for a living, then through a lot of case law and documentation, you’ll find that the IRS really emphasizes that those activities have an intent to influence decision making. So that there’s a lot of difference between monitoring or being educated about legislative stuff that’s coming through as opposed to asking someone to vote a particular way or doing something to influence them to act in a certain way. That’s the key. And some examples, a lot of these association groups often have in house staff that are charged with this responsibility.
So their job is to be down at the State House or even up at the federal level in DC to monitor legislation that’s being introduced and walked through the legislative process, to keep their association membership informed about that for one thing, but also to meet with those legislators in an attempt to influence them to vote or act in favor and in a way that would help their groups, their association groups.
So those folks that do that, you’re talking about their salaries, you’re talking about their benefits, payroll taxes associated with things like that. We also allocate overhead expenses to those type of activities, and it can also be third party expenditures like hiring a third party lobbying firm, which is pretty common in this space.
Phyllis Ingram:
So if we allocate salaries, how does that determine? Do the association staff, do they keep their estimates, their time, and it’s allocated based on their time, or how does that work?
Chad Singletary:
Yeah, great question there. So we’ll talk in a couple of seconds about capturing these lobbying expenditure amounts. One of the key ways that we do that in the association environment is that those folks, a lot of folks in association environments, but those folks in particular that work with legislative activities will track their time. So if they work 2000 hours a year, they may ultimately say, “I spent about a hundred or 200 hours down at the state house meeting with legislators, asking them to vote certain ways or trying to influence their decisions.” So they essentially, and I don’t want to get too far down the weeds here, but we get a percentage of their time allocated to those lobbying activities. So we take their salary, we take their payroll tax, their benefits, there’s overhead allocation. Those folks have offices, they have telephones, computers, things of that nature.
So there’s overhead allocation as well, but ultimately you arrive at a number for that person or maybe a staff of people for that association group to quantify those expenditures.
Phyllis Ingram:
Oh, great. Well tracking those expenses are important, particularly if you have unrelated business income from this. But if association groups do have lobbying activities, what steps do they need to take to make sure they’re in compliance with the requirements?
Chad Singletary:
Another good question. So the way I think about it is we mentioned four groups, right? We mentioned 501C3, four, five and six. So for this part of the discussion, let’s say 501C3 and the others, because they both take a couple of different paths. 501C3s, people probably don’t, if you don’t do what we do for a living, you might not be aware of this, but 501C3s are actually by default, prohibited from lobbying. They’re charitable organizations out of the gate, they’re not allowed to lobby by default. However, they can make an election commonly referred to as a 501H election. It’s sort of like 501C3 raising this hand and saying, “Hey, I know I’m not supposed to lobby, but I’m going to make this special election so that I can lobby on a limited basis.” So once they make the election, they go through a process annually of filing a Form 99, Schedule C where they say, “Okay, here are the amounts we spent on lobbying compared to our total expenditures.” That little process determines what the limitations are on that organization.
So each year they have to ensure that they spend less than those amounts on lobbying type activities. Now, it gets tracked over a four-year averaging period, essentially. So that 501C3 organization tracks it over four years. And if they’re consistently over those limitations for a four-year period, they can incur an excise tax on those excess lobbying activities or expenditures, however you want to look at it. That tax can be at the highest corporate marginal rate, which currently is about 21%. So that’s the 501C3. Hey, I want to lobby, file an election, and then stay within certain limitations. Okay?
Phyllis Ingram:
And I may have missed this, but is that a percentage limitation or how is that limitation calculated? Is it a dollar amount, percentage of their revenue, or how is that calculated?
Chad Singletary:
Well, what it does, Schedule C, little block on Schedule C, you put this information in about what you spend on lobbying and it’s sort of stratified based on what your total expenditures are, the ranges of total expenditures, what you spent, and your total expenditures, again, compared to a ratio, and then it kind of throws out a limitation for you. The ones I’ve been involved with, it is a limitation, but it’s not as low as you might think. It’s 20 to 30% of annual spending. So if you’re spending a million dollars total a year on a budget, we’re talking two or $300,000 that you could probably spend on direct lobbying efforts and stay underneath those limitations in a 501C3 environment.
Phyllis Ingram:
That’s interesting.
Chad Singletary:
Yeah. So the others, the four or five and six 501C organizations, they have a little bit of different path. So unlike 501C3s, they are not prohibited from lobbying. In fact, they don’t have to file an election. They don’t have to do anything but lobby. Then all they have to do is comply with the rules, the limitations, and the disclosure requirements. So first, they have to determine what they’re spending money on that would quantify, qualify rather, as lobbying expenditures. And again, that’s sort of what we were talking about a few minutes ago. In-house staff who are monitoring legislation, conducting those type of activities, third party lobbyists maybe, who are hired and are working for those association groups.
It could also include, sometimes they have legislative receptions where they have a lot of lobbyists there and they’re just mixing and mingling, but they’re also trying to influence decisions that are about to be made as the session opens. But those amounts also include overhead, like we’ve discussed, health benefits and things of that nature. So they figure out what that number looks like, also the allocation that we just talked about as time and effort. They take those amounts and then this four, five and six organizations got to make a decision and they have one and two paths that they’re going to go down. They can either go, I call it the disclosure route to their membership or the proxy tax route. So they essentially have to quantify the cost and determine a percentage of their annual spending that’s related to direct lobbying. Let’s say it’s 12%, 14%.
Then they have to communicate that to their membership. So it’s typically done with a dues billing. I send you a billing for your dues this year are $1,000. And there will be some language on the bottom of that invoice that says, “Hey, based on our lobbying efforts, we have estimated that about 120 of your thousand dollars is not deductible for federal tax purposes.” That’s the disclosure route. So if the organization does not want to notify their membership or disclose their membership, the non-deductibility, and we’ve had groups like that that lobby heavily. Let’s say 75% of their dues are not deductible for lobbying expenditures.
Well, they did not want to or did not think it was good appearance to disclose 75% is lobbying to membership. So there is an alternative route, a proxy tax route. So same number that you determine as lobbying expenditures, and then you elect to pay the corporate marginal tax rate as a proxy tax on those amounts. So if you’re thinking about it this way, you’re either telling your members, “Hey, you can’t deduct it for tax purposes,” or, “Hey, don’t worry about it. You can deduct it. We’re going to pay the tax at the association level.” So a couple of different routes there. Both organizations, the C3 route or the others, the four, five, six route, they file something called a Schedule C with their annual tax return 499 to disclose this information to demonstrate compliance with these rules and limitations. And that is tracked over time. That’s a lot of detail, but just think of it as two paths.
Am I going to disallow it for my members or am I going to pay the tax myself at the association level?
Phyllis Ingram:
Yeah. And tracking those lobbying expenses are so critical at the association group level. I see a lot of times where associations will have a law firm or somebody internally and they’re just really monitoring legislation and seeing its effect on their members. Would that be considered lobbying or no?
Chad Singletary:
Yeah, that’s a great question because what I find working with association groups is more often than not, they tend to think an activity is direct lobbying when if you go read the code and the case law and the IRS guidance, it’s probably not. Okay. So that’s what I was emphasizing earlier in the discussion is that if an association has an executive director that hangs out at the State House and he’s monitoring legislation, so he can come back to the office and write an article for his membership, “Hey, here’s what’s going on in the State House, they’re proposing this, they’re proposing this, et cetera.” That’s not lobby. That’s an education effort on their part to just keep their membership aware, sort of like what you were describing, an attorney monitoring or a third party lobbyist. So the real key is what we talked about earlier. Now, if I go and monitor that legislation, I write articles to entertain, excuse me, to educate my entertainment, I bet it’s entertaining, or to educate my membership, that’s monitoring, that’s okay.
But let’s say I get feedback from my membership, then I go back to the State House, I meet with 15 legislators and say, “This is going to kill my industry. This is going to be very negative for us. We really need you to vote no on this piece of legislation.” Then you just cross the threshold into direct lobbying, that ask or influence on decision making. And normally what a lot of the IRS guidance will say is that… They call it like forbidden fruit or refer to as an example. So if that’s where you end up asking somebody to vote a particular way, then it sort of captures all that effort, that time and effort and that expenditure. But if all you’re doing is monitoring and making people aware, then that would not fall into the categories of direct lobbying. No.
Phyllis Ingram:
Oh, that’s very helpful. Are there any exceptions to these rules, Chad?
Chad Singletary:
Yeah, there’s several. I’ll talk about a couple here. Well, first, for the 501C3 organizations, not really. Not really any exceptions. They’re either prohibited from lobbying or they make the election and live under the limitations. The others, the four, five, and six organizations, there’s a bunch of exceptions actually. There’s probably like a dozen. Some of them are very specific and isolated, so I won’t go into those, but a couple I’ll mention. If you’re a small organization and you do a little bit of lobbying, but let’s say your lobbying expenditures or effort is $2,000 or less, then it’s kind of like a standard deduction. You’re out the door. You don’t have to comply with any of these requirements. If you’re in a lobbying organization and all of your members pay a very small amount of views that’s indexed for inflation, think tenured, teachers union. Okay. They’re paying $130, $140 a year.
They’re not deducting that on their 1040, because we all know the rules associated with deducting on 1040s. They’re not getting a deduction, so that’s one of the exceptions. Another one is, if you’re an association, you’re a lobbying group, and you can quantify or calculate that about 90% of your membership is unable to deduct their dues or does not need to deduct their dues, that’s also an out. So think about this. If you are an association of municipalities or cities, then you would meet this exception because most all of your memberships would be cities, towns. They don’t have a need to, nor would they want to file tax returns to deduct those lobbying expenditures. So we’ll call it the 90% exception. That’s another good example. And there are others, like I said, there’s probably six or eight more exceptions, but very narrow, very specific to certain types of organizations.
Phyllis Ingram:
Well, that’s helpful too. So what other concerns are there for association groups related to lobbying activities?
Chad Singletary:
Well, in working with associations, I always think we’ve got to comply with the law. We got to know the details. That’s true. But I try to keep in mind that these association groups are typically public facing organizations. They have a high profile, may have a high profile in the media or in the public space. They file a 99, which is required to be made available for public inspection and scrutiny, by the way. So if you’re in a political environment and one of your adversaries or somebody that’s on the other side of the aisle from you, they have access to your Form 99 and your Schedule C and all this information you’re filing. So you want to make sure it’s accurate and reflects your organization accurately is what I think about. So there’s a little bit of reputational risk or could be some reputational risk there for the association group if they’re not complying with these requirements.
And then importantly, failure to comply with these requirements might lead to endangering your tax-exempt status with the IRS. If you’re examined and they find that you’re in gross non-compliance with these rules, then you could find yourself sideways with IRS, which no one wants. But that really, it’s a lot of details there we talked about, but just I think it’s important that associations are aware, “Hey, this exists.” And then they ask themselves the question, “Are we getting involved in lobbying activities? If we are, what are the rules that we have to play by?” And that’s just sort of a summary. Some of it’s a little more detailed. You’ll want to talk to your tax advisor, CRI partner to help you walk through those processes.
Phyllis Ingram:
Well, thank you, Chad. That’s been very educational and helpful. And I appreciate your time and educating us on the lobbying activities for association groups.
Speaker 1:
If you want more CRI insights or are interested in learning about our firm, please visit our website at CRIADV.com. Thanks for listening to this episode of It Figures, the CRI Podcast. You can subscribe to It Figures on Spotify, Apple Podcasts, or wherever you prefer to listen to your podcasts. If you liked what you heard today, please leave us a review. CRI Advisors LLC is not a CPA firm. Assurance, attest and audit services provided by Carr Riggs and Ingram LLC. Carr Riggs and Ingram and CRI are the brand names under which Car Riggs and Ingram LLC, CRI CPA, CRI Advisors LLC, CRI Advisors or Advisors, and Capin Crouse LLC, Capin Crouse CPA, and CRI Capin Crouse Advisors LLC. Capin Crouse Advisors provide professional services. CRI CPA, Capin Crouse CPA, CRI Advisors, Capin Crouse Advisors, Carr Riggs and Ingram Capital, LLC, and their respective subsidiaries operate as an alternative practice structure in accordance with the AI CPA Code of Professional Conduct and Applicable Law, regulations, and professional standards.
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