Deducting Expenses Related to Lobbying & Government Affairs

November 2015

BY

Timothy JonesManaging Director, Business Incentives & Tax Credits

Kris ShutySenior Manager, Core Tax Services

Updated January 2022

Given the possibility that the pending tax legislation currently making its way through Congress might result in an increase in the corporate tax rate, it may be a good time for a fresh look at the deductibility of expenses related to lobbying and government affairs.

Internal Revenue Code (IRC) Section162(e) disallows tax deductions for lobbying expenditures. Some companies, however, may be using an overly broad definition of "lobbying" to identify their nondeductible lobbying expenditures and as a result may be missing an opportunity to reduce their tax liability.

Many companies identify their nondeductible lobbying expenditures as the amounts the Lobbying Disclosure Act (LDA) requires them to report to the federal government each quarter. The problem with this approach is that the LDA amounts may be overly broad for tax purposes and may include expenditures that are deductible.
 

Nondeductible Lobbying Expenditures

An expenditure is nondeductible under Treas. Reg. §1.162-29 to the extent it seeks to influence legislation.

Examples include expenditures to:
  • Participate or intervene in any political campaign for or against any candidate for public office.
  • Attempt to influence the general public, or segments of the public, about elections, legislative matters or referenda.
  • Communicate directly with certain executive branch officials in an attempt to influence their official actions or positions.
  • Research, prepare, plan or coordinate any of the above.
 

Deductible Government Affairs Expenditures

Expenditures for activities that do not seek to influence legislation, on the other hand, may be deductible.

Such expenditures include those typically—but not necessarily—incurred by government affairs departments, such as for monitoring, reviewing, analyzing and attempting to comply with current and proposed legislation.

Other examples include:
  • Monitoring, understanding, and preparing routine public policy briefs.
  • Discussions regarding existing laws, regulations, rules and policies.
  • General industry or business issues, including attending or presenting at industry-related meetings and events.
  • Reputational lobbying or relationship building.
  • Administrative or other activities (LDA compliance, budgeting, managing, expense reports, travel arrangements, vacation, etc.).
  • Ordinary and necessary business expenses paid or incurred with respect to legislation of any local or foreign council or similar governing body.
  • Reading any publications available to the general public or viewing or listening to other mass media communications.
  • Merely attending a widely attended speech.
  • Other routine administrative activities performed by government affairs departments, such as budgeting, human resources, and expense reporting activities.
 

Next Steps

If your company pays or incurs expenses related to lobbying, it may be understating its deductions and overpaying its taxes.

To determine whether a company is properly deducting expenses related to lobbying, it should consider the following questions:
  • Does the company report lobbying expenses under the LDA?
  • If so, does the company report all LDA expenses as nondeductible?
  • Does the company’s tax department have a process in place to review such expenditures and segregate "lobbying" expenditures from other expenses that may be deductible?
  • If so, has this process been reviewed recently?
  • Does the company have the time and expertise to review and properly allocate all of the expenses involved as either deductible or nondeductible?

BDO can help you think through all of these considerations. We can also help your company develop an efficient and effective process you can implement now and leverage in the future.