Andrew H. Emerson is an Associate in our Washington, D.C. office.
With first quarter lobbying disclosure reports due right around the corner, now is often the time of year when lobbying registrants look to estimate their lobbying expenses for the prior quarter. If they are members of trade association, this includes determining what percentage, if any, of their trade association dues are reportable as lobbying expenses.
The Lobbying Disclosure Act of 1995 (LDA), as amended (2 U.S.C.§ 1601 et seq.), requires lobbying registrants to publicly disclose their lobbying activities and expenses on a quarterly basis. These disclosures must be submitted electronically to Secretary of the Senate and the Clerk of the House of Representatives via form LD-2. The first quarter report for 2016, which is due April 20, 2016, must disclosure a "good faith estimate" of all lobbying expenses incurred between January 1, 2016 and March 31, 2016. This includes any portion of membership dues payments made during a quarter that are attributable to lobbying activity.
Incorporating Membership Dues
Membership dues and similar payments made to trade association ("Business Leagues" exempt from federal taxation under Section 501(c)(6) of the IRC) are considered reportable lobbying expenditures under the LDA to the extent that the dues are used for a lobbying purpose. Unlike other LDA expenses, these dues should be reported in the month in which they are paid rather than when they are incurred, e.g., if a registrant pays its annual dues in their entirety in January, they will need to report the total expense in their 1st Quarter LDA report.
LDA Guidance provided by the Secretary of Senate and Clerk of the House suggests that "[a]n organization must contact any other organization to which it pays membership dues in order to learn what portion of the dues is used by the latter organization for lobbying activities." However, many trade associations are unable to provide a clear estimate of what percentage of dues will be used for federal lobbying versus state or local lobbying and political activities.
Thankfully, there is generally a relatively easy way to obtain a conservative estimate of the percentage of dues used for lobbying because IRS regulations require trade associations to either disclose how much they spend to influence legislation to members when they pay their dues, or pay a substantial tax penalty - currently 35 percent. Unsurprisingly, the vast majority of trade associations take the former approach, and provide their dues-paying members with an estimated percentage on their invoices.
Although the amount spent to influence legislation may include expenses for state, loca, and political activity, lobbying registrants can conservatively rely on this percentage to reasonably estimate the amount of their dues that constitute lobbying expenses for the purposes quarterly lobbying disclosure filings.
The IRS encourages disclosure on invoices or notices at the times of dues payments because Section 162 of the Internal Revenue Code (IRC) prohibits businesses from taking a deduction for lobbying and political expenditures. As a result, IRS regulations prohibit deduction of dues paid to membership organizations to the extent that the organization is engaged in lobbying and political activity. Reg. 1.162-20(c)(3). The regulations requiring disclosure to members are intended to shift the burden of calculating this information from individual companies on to trade associations and other exempt organizations, which are also required to disclose such expenditures on Schedule C of their annual Tax Return (Form 990).
A Typical Example
For the sake of clarity, consider a situation where members of a trade association pay annual dues of $150,000, which are paid in full in the first quarter. The trade association invoice indicates that 60 percent of dues are tax deductible as an ordinary business expense, resulting in 40 percent of dues being nondeductible lobbying or political expenses. In this case, the lobbying registrant will include 40 percent ($60,000) in the lobbying expenses they disclose on their LD-2 submission this April. Alternatively, if the trade association regularly requires dues to be paid incrementally (ie. $150,000 is paid on a quarterly or monthly basis) then the registrant would only disclose those amounts actually paid in the first quarter. Notably, however, this must be the common practice of the trade association because the LDA Guidance indicates that a registrant "cannot apportion the lobbying expense part of the dues to avoid disclosure."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
