Andrew Emerson is a Partner for Holland & Knight's Washington, D.C. office.
With tax-reform on everyone's radar, Trade Associations and other advocacy groups operating as business leagues should be aware that the most recent proposals released by the House Committee on Ways and Means might impact the deductibility of expenses that are intended to local councils or similar governing bodies, including tribal governments.
As we have previously discussed, Section 162 of the Internal Revenue Code (IRC) generally prohibits businesses from taking a deduction for lobbying and political expenditures. As a result, IRS regulations prohibit deduction of dues paid to membership organizations (particularly trade associations) to the extent that the organization is engaged in lobbying and political activity. Reg. 1.162-20(c)(3). Currently, this general prohibition does not apply to "local councils and similar governing bodies," which the IRS has broadly construed to include city and county councils, as well as tribal governments.
If passed as currently drafted, Section 3305 of H.R 1, the Tax Cuts and Jobs Act, would eliminate this exception for local lobbying activity, increasing overall tax revenue by $0.8 billion over the next ten years.
If the Tax Cuts and Jobs Act passes, and this provision survives ongoing negotiations in its current form, then there may be a substantial impact on trade associations and corporations that engage with local governments, particularly those actively working with tribal governments. Corporate tax-compliance professionals and trade associations will need to revise the process by which they determine the percentage of annual expenditures and dues that will no longer be deductible as an ordinary and necessary business expense.
For more on Trade Association calculation and disclosure of non-deductible lobbying expenses, see First Quarter Lobbying Disclosures: Incorporating Trade Association Dues.
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