Deducting Expenses Related to Lobbying & Government Affairs
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IRC §162(e) disallows a tax deduction for lobbying expenditures. Many companies, however, are using an overly broad definition of "lobbying" to identify their nondeductible lobbying expenditures. By not identifying deductible expenses for non-lobbying but government-affairs-related activities, many companies are missing an opportunity to reduce their current 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 include expenditures that are deductible.
Nondeductible Lobbying Expenditures
An expenditure is nondeductible under Treas. Reg. §1.162-29 if 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 any attempt to influence their official actions or positions; and
- 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, e.g., for monitoring, reviewing, analyzing, and trying to comply with current and proposed legislation.
Other examples include:
- Ordinary and necessary business expenses paid or incurred with respect to legislation of any local or foreign council or similar governing body;
- Activities that do not seek to influence legislation, such as determining the existence or procedural status of specific legislation, or the time, place, and subject of any hearing to be held;
- Preparing routine summaries of the provisions of specific legislation;
- Performing an activity for purposes of complying with the requirements of any law, and discussions regarding existing laws, regulations, policies, or governmental programs;
- Reading any publications available to the general public or viewing or listening to other mass media communications;
- Merely attending a widely attended speech; and
- Other routine administrative activities performed by government affairs departments, e.g., budgeting, human resources, and expense reporting activities.
If your company pays or incurs expenses related to lobbying, it may be understating its deductions and overpaying its taxes.
We recommend considering the following:
- Does your company report lobbying expenses under the LDA?
- If so, does your company report all LDA expenses as nondeductible?
- Does your tax department have a process in place to review such expenditures and segregate "lobbying" expenditures from other expenses that are deductible?
- If so, has this process been reviewed recently? Recently released regulations have led many companies to shift the focus of their Government Affairs departments from influencing legislation to determining how to assist the company in complying with new legislation. Companies that follow the same-as-last-year approach for their Government Affairs expenditures may be missing opportunities to save.
- Do you 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.