In case it has slipped your mind, the first quarter LD-2 reports are due on Monday, April 22, 2013; hopefully you are just about finished with your report. If you haven’t, remember the first quarter report offers an opportunity to consider which method your organization uses to report lobbying expenses: A, B, or C.
The Lobbying Disclosure Act (“LDA”) provides these options in recognition of the fact that business and nonprofit entities must also track lobbying for tax purposes, and that the lobbying and tax laws do not define lobbying the same way. While using one method might simplify things for some filers, there are other considerations. You must use the same definition for an entire year, so now is the time to choose.
Businesses and Trade Associations: Method A or Method C
Section 162(e) of the Internal Revenue Code prohibits businesses from deducting their expenses related to certain kinds of lobbying activities. In addition, Section 162(e)(3) prevents businesses from avoiding this tax by paying their trade associations do their lobbying. Thus, associations must either (1) notify their members how much of their dues are used for lobbying and therefore are nondeductible or (2) pay a proxy tax on the amount the association spends on lobbying. Unfortunately, the definitions of lobbying under section 162(e) and the accompanying regulations in 26 C.F.R. § 162-29 are not the same as the definitions of lobbying found in the LDA.
To avoid keeping multiple sets of timesheets, books, and records, to determine how much money an organization spends on lobbying, the LDA allows businesses and trade associations to use the 162(e) definition to report the amount spent on lobbying (Method C). This might make life easier, but requires more ongoing involvement with your accounting office and can result in an artificially high amount being reported on the LD-2 report, because it will include things like money spent on state lobbying and on grassroots lobbying (two often very expensive activities that are not reported when using the LDA definitions). This article gets into the weeds on the differences, but the following chart provides a basic overview of how the LDA and 162(e) definitions differ.
501(c)(3) Charities: Method A or Method B
501(c)(3) organizations have a different set of tax issues to consider: whether a substantial part of their activities are considered to be “carrying on propaganda or otherwise attempting to influence legislation.” If they are, then they can lose their exempt status or face tax penalties. As this article explains, there are several ways organizations can track their lobbying. One of those methods, known as the 501(h) election, provides a concrete set of definitions of lobbying (by statute and regulation), in exchange for specific monetary limits on the amount a 501(c)(3) can spend on lobbying. These definitions differ from the LDA definitions of lobbying.
Like the option for businesses and association to report using their applicable Tax Code definitions, the LDA allows these electing charities to choose to report using the definitions of lobbying they use when making the 501(h) election (found in Section 6033(b)(8) of the Tax Code). Only those entities that have made the 501(h) election are allowed to choose Method B. Those using the general “facts and circumstances test” must use Method A to report.
At the end of the day, there are several factors to balance when deciding which method to use when reporting:
• Is most of your lobbying federal legislative branch lobbying? If so, it won’t matter much if you use your applicable tax code method or the LDA method to report, because the numbers will be similar. In that case, you can probably use Method B or C (depending on which is applicable to your organization) to simplify.
• If your lobbying includes a lot of state lobbying and/or grassroots lobbying, the number you report using the Tax Code will likely be significantly higher than if you report using Method A. You will have to balance the ease of keeping one set of books with the potential public relations issues of having a high lobbying number.
• If your lobbying involves a lot of executive branch lobbying, using the Tax Code will both produce a lower number and make tracking your lobbying time much easier.
Regardless of the method you choose, remember that a good tracking system should be accurate and easy to use, so that your organization produces accurate tax returns and accurate LDA reports.