Breakfast with the IRS Justin Lowe, Tax Law Specialist Exempt Organizations, Internal Revenue Service (202) 283-9486 "Material provided in this presentation.

Breakfast with the IRSBreakfast with the IRS

Justin Lowe, Tax Law SpecialistJustin Lowe, Tax Law SpecialistExempt Organizations, Internal Revenue ServiceExempt Organizations, Internal Revenue Service

(202) 283-9486(202) 283-9486

"Material provided in this presentation is for educational use only and is not intended to establish IRS position or practice and may not be relied on or cited as precedent. For more detailed information, please refer to the "Charities and Nonprofits" section of IRS.gov."

www.irs.gov/polorgs

§ 527 Tax Treatment

• Prior to July 2000: All political organizations tax-exempt

• July 2000: New reporting and disclosure requirements created

• November 2002: Reporting and disclosure requirements amended

Automatic Tax-Exemption

• Committees of state or local candidates

• State or local party committees

• Organizations required to report under FECA as political committees

• Organizations that never receive or expect to receive more than $25,000 in any year

§ 527 Political Organization

An organization that is organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures for a § 527 exempt function

§ 527 Exempt Function

Section 527 exempt function activity is defined as attempting to influence the selection, nomination, election or appointment of any individual to Federal, State, or local public office, office in political party, or Presidential electors.

Types of § 527 Organizations

Federal, state and local:

• Candidate Committees

• Political Parties

• Political Action Committees (PACs)

Organizational Requirements

• No formal organizational requirements necessary – political organization may be, but need not be, incorporated (opening a bank account sufficient)

• Employer Identification Number (EIN) needed – even if no employees

• Form SS-4

www.irs.gov/polorgs

Employer ID Number

Form SS-4

Form 8871 Not Filed Notice

Form 8871 Not Filed Notice

• Political organizations that do not file Form 8871 will receive notice

• Organizations that are automatically tax-exempt fill out Section I, sign Section III and return to IRS

• Organizations that file Form 8871 late may use Section II to explain reasonable cause

Notice Response

Automatic Tax-Exemption

• Committees of state or local candidates

• State or local party committees

• Organizations required to report under FECA as political committees

• Organizations that never receive or expect to receive more than $25,000 in any year

Tax-Exempt v. Taxable

• Tax-Exempt Political Organizations• Automatic – only Form 1120-POL

• Otherwise – Form 8871, Form 8872 and Form 990 in addition to Form 1120-POL

• Taxable Political Organizations• File Form 1120-POL

• All income, including contributions, subject to 35% tax

Taxation of § 527 Organizations

• Taxable income taxed at highest corporate rate (currently 35%)

• Principal campaign committees of candidates for U.S. Congress taxed at graduated corporate rates (beginning at 15%)

Taxable Income

All income (including investment income) except:• Contributions• Membership dues and assessments• Political fundraising or entertainment event

income, provided not regularly carried on trade or business

• Sale of political campaign materials, provided not regularly carried on trade or business

• Bingo income

Deductions Allowed

• Only expenses directly connected to earning taxable income deducted• Includes expenses such as brokerage fees for

investment accounts• Does not include fundraising expenses or

political campaign expenditures

• $100 specific deduction allowed

Form 1120-POL

Form 1120-POL

• Form 1120-POL required to be filed if organization has taxable income after taking $100 specific deduction

• Activity can be structured to avoid receipt of taxable income so no Form 1120-POL required

• Organization may file Form 1120-POL to start statute of limitations period running

• Form 1120-POL due 15th day of 3rd month after year end (March 15th for calendar year)

Form 8871

• Required to be filed within 24 hours of establishment or within 30 days of material change to be tax-exempt

• Must be filed electronically at www.irs.gov/polorgs

• Organization is taxable political organization until Form 8871 is filed

• IRS may waive tax for reasonable cause

Political Organization Filing and Disclosure

Form 8872

• Only required if Form 8871 filed• QSLPOs not required to file• Failure subjects organization to

assessment of 35% of contributions and expenditures not properly disclosed

• IRS may waive assessment for reasonable cause

Form 8872

Form 8872

• Periodic reports of contributions and expenditures• Even-numbered years: monthly or quarterly

with pre- and post-election reports• Odd-numbered years: monthly or

semiannually

• Organizations with contributions or expenditures exceeding $50,000 for the year must file electronically

Form 8872

Contributor and Payee information disclosed

• Name

• Address

• Amount of Contribution or Expenditure

• Occupation (if contributor or payee is individual)

• Employer (if contributor or payee is individual)

• Date of Contribution or Expenditure

• Purpose (for expenditures)

Form 8872- Schedule A

Form 8872 – Schedule B

QSLPO

• Organization limits activities to state and local elections

• Organization required to and reports Form 8872 information to a state agency

• State agency makes report available

• Organization makes report available

• No federal candidate or officeholder involvement

Form 990

• Annual information return• Only required if Form 8871 filed• Caucus or association of state or local

officials not required to file• QSLPO required to file when gross

receipts equal $100,000 or more• All others required to file when gross

receipts equal $25,000 or more• Due 15th day of 5th month after year end

(May 15th for calendar year)

Public Disclosure

• Form 8871, Form 8872 and Form 990 required to be publicly available

• Form 1120-POL not publicly available

• Filed forms available on IRS web site at www.irs.gov/polorgs

• Mailed in filings available as pdf images

• Electronic filings searchable on all fields and downloadable

Solicitation Notice

Must provide notice that contributions are not deductible for Federal income tax purposes as charitable contributions (section 6113)

Notice 88-120 provides safe harbor

Exception for small organizations (less than $100,000 annually)

Notice 88-120

Employment Taxes

Other Exempt Organizations

• § 501(c)(3) – Charitable Organizations

• § 501(c)(4) – Social Welfare Organizations

• § 501(c)(5) – Labor, Agricultural and Horticultural Organizations

• § 501(c)(6) – Business Leagues, Trade Associations, etc.

§501(c)(3) Status:Charitable Organizations

An organization must be organized and operated exclusively for an exempt purpose—charitable, religious, educational, scientific, etc.

§ 501(c)(3) and Elections

• Participating in, or intervening in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office – Absolutely prohibited

• Encouraging people to participate in the electoral process in non-biased, neutral manner – § 501(c)(3) purpose

Political Campaign Activity

• Any and all activities that favor or oppose one or more candidates for public office

• Includes candidate endorsements and contributions to campaigns

• Includes distributing materials prepared by others that favor or oppose candidates

• All facts and circumstances will be considered

IRS Activity

• Political Activities Compliance Initiative (PACI)• “Fast Track” evaluation of allegations• Review of public campaign disclosures

• Guidance• Fact Sheet 2006-17 (plain language)• Revenue Ruling 2007-41 (precedential)• 21 examples illustrating application of facts

and circumstances test

§ 501(c)(4) Status:Social Welfare Organizations

An organization must be operated exclusively for the promotion of social welfare--promoting the common good and general welfare of the people in the community

§ 501(c)(5) Status:Labor, Agricultural & Horticultural Organizations

An organization must be operated for the betterment of conditions of those engaged in their pursuits and their earnings may not inure to the benefit of any member.

§ 501(c)(6) Status:Business Leagues, Trade Associations, etc.

Organizations that are associations of persons with a common business interest which promote the common interest and do not conduct a regular trade or business for profit

§ 501(c)(4), (c)(5), or (c)(6) Status

• Primary activity must be in furtherance of exempt purpose

• May engage in non-exempt purpose activities without jeopardizing exemption provided less than primary activity

• Lobbying may be exempt purpose activity

• Political campaign activity is not exempt purpose activity

§ 527(f) Tax Consequences

• Taxed on lesser of political expenditures or investment income

• May set up separate segregated fund - taxed as political organization

501(c)(3) 501(c)(4) 501(c)(5) 501(c)(6) 527

Receive Tax‑Deductible Charitable Contributions

YES NO NO NO NO

May Receive Contributions or Fees Deductible as a

Business Expense

YES YES YES YES NO

Substantially Related Income Exempt from Federal Income Tax

YES YES YES YES YES

Investment Income Exempt from Federal Income Tax

YES YES YES YES NO

Engage in Legislative Advocacy

LTD YES YES YES LTD

Engage in Candidate Election Advocacy

NO LTD LTD LTD YES

Engage in Public Advocacy Not Related to Legislation or

Election of Candidates

YES YES YES YES LTD

For More Information

IRS Charities & Nonprofits Website: www.irs.gov/eoSubscribe to EO Update – link at bottom of page

IRS Political Organization Website:

www.irs.gov/polorgs

TE/GE Customer Account Services: • (877) 829-5500 (toll-free)• P.O. Box 2508 Cincinnati, OH 45201

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