Rev. Rul. 115-63: Non-Deductible Political Expenses
Gain insight into the tax principles that classify corporate political spending as a non-deductible expense, distinct from ordinary business operations.
The Internal Revenue Code (IRC) establishes that political contributions made by corporations are not deductible. Tax law clarifies that payments made for political purposes are not considered ordinary and necessary business expenses. This prevents businesses from deducting these costs from their taxable income.
The Core Prohibition on Deductibility
The Internal Revenue Code permits businesses to deduct “ordinary and necessary” expenses incurred in carrying on a trade or business. An ordinary expense is one that is common in the taxpayer’s industry, while a necessary expense is one that is helpful and appropriate. Contributions to political candidates or parties do not meet this standard because they are not considered directly related to the production of business income. They are seen as promoting a candidate, party, or cause, which is an activity separate from the company’s primary trade or business.
Scope of Non-Deductible Political Expenditures
The IRS outlines a broad range of non-deductible political contributions, extending to both federal and state-level political activities. The disallowance covers direct cash payments and the costs associated with activities that support a political cause. Examples of non-deductible expenditures include:
- Direct monetary contributions to a political party, a campaign committee, or an individual candidate.
- Payments to participate or intervene in a political campaign, in support of or opposition to a candidate.
- Expenses for placing advertisements in any medium that express views on a candidate or election.
- Costs of sponsoring or attending dinners or fundraisers if the proceeds benefit a political party or candidate.
Application to Lobbying and Association Dues
The non-deductibility rule extends to lobbying and payments to trade associations. Businesses cannot deduct expenses for lobbying and political activities, including costs to influence legislation or the official actions of certain high-level federal executive branch officials. These activities are viewed as attempts to influence public policy rather than as direct costs of conducting business.
This rule also applies to dues paid to trade associations, unions, or similar tax-exempt organizations. If a portion of a member’s dues is used by the organization for non-deductible lobbying or political activities, that portion of the dues is not deductible by the member corporation. The tax-exempt organization is responsible for notifying its members of the specific amount or percentage of their dues that is allocable to these expenditures.
Tax Reporting and Compliance
Companies must implement internal accounting procedures to accurately track and segregate non-deductible expenditures from deductible business costs. This involves identifying payments for political contributions, lobbying, or the non-deductible portion of association dues.
When a corporation files its annual income tax return on Form 1120, it must reconcile its financial accounting income (book income) with its taxable income. This reconciliation is performed on Schedule M-1 or, for larger corporations, Schedule M-3. Non-deductible political expenses are a common reconciling item that are deducted for book purposes but must be added back to book income on the tax return to calculate the final taxable income.