IRC 527 addresses the federal taxation of political parties and organizations. This IRC section took effect for the tax year that began January 1, 1975, and established the only taxation for these organizations. Otherwise, they are tax-exempt organizations. An IRS Continuing Professional Education article on IRC 527 is instructive in discussing the definition of a political organization. For questions about IRC 527 and other tax laws that may apply to your organization, contact the offices of the Church Law Center today at (949) 892-1221 or online.
Understanding the Definition of a Political Organization
Under Sec. 527(e)(1), a political organization is “a party, committee, association, fund, or other organization (whether or not incorporated) organized and operated primarily for directly or indirectly accepting contributions or making expenditures, or both, for an exempt function.” Political organizations include committees or other groups that accept contributions or spend money to promote nominations of individuals for elective public offices in primary elections or meetings or caucuses of political parties.
The organization’s articles of organization must state that its primary purpose is to carry out one or more exempt functions. If the organization has no formal articles of organization, the members may have made statements or a resolution declaring their primary intent to engage in exempt functions. However, a political organization is not required to be a formally organized entity or exclusively participate in exempt functions.
Political Organizations and Exempt Functions
Political organizations must spend or set aside any earnings they receive on an exempt function, or it is taxable. For the purposes of IRC 527, an “exempt function” is “the function of influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any Federal, State, or local public office or office in a political organization, or the election of Presidential or Vice-Presidential electors, whether or not such individual electors are selected, nominated, elected, or appointed.” Exempt expenditures may consist of direct or indirectly related expenses.
Directly Related Expenses
Directly related expenses include all activities relating to and supporting the selection process. Generally, any expenditures that a political organization makes to support an individual’s campaign for public office are directly related expenses. Directly related expenses and activities fall into a broad category. Even expenditures that occur between election cycles may constitute directly related expenses so long as they are directly related to the selection process in the next election. However, some campaign-related expenses, such as the purchase of periodicals to update candidates on local and national political issues, are not exempt as directly related.
Indirectly Related Expenses
Indirect expenses are for an exempt function if they are “necessary to support the directly related activities of the political organizations.” In other words, the expenses must support activities the political organization must engage in to allow it to influence or attempt to influence the selection process. Examples of indirectly related expenses include those incurred in soliciting contributions, recordkeeping, and other general overhead costs. Other expenditures, such as the candidate diverting funds for personal use, do not qualify as indirectly (or directly) related expenses.
Under IRC 527, a political organization’s exempt function must be related to the selection process, which is “influencing or attempting to influence the selection, nomination, election, or appointment of any individual to public office or office in a political organization.” A public position is a “public office” if the public employee independently performs a policy-making position as a significant part of their activities.
Taxable Income of Political Organizations
Political Organization Taxable Income
Typically, the IRS taxes only a political organization’s net investment income and business income. Political organization taxable income is the organization’s gross income, with a specific deduction of $100, no net operating loss deduction, and no special deductions for corporations. Indirect expenses are not allowable as deductions, but direct expenses may be deductible so long as they are “directly connected” or have a proximate and primary relationship with the production of political organization taxable income.
Exempt Function Income
In contrast, the IRS does not tax the exempt function income of political organizations. Exempt function income includes any amounts received as four different types of receipts that the political organization segregates for use only for its exempt function, including the following:
- Contribution of money or other property;
- Membership dues or a membership fee or assessment from a member of the political organization;
- Proceeds from political fundraising or entertainment events or sale of political campaign materials, which are not received in the ordinary course of any trade or business; and
- Proceeds from conducting any bingo game.
Call Church Law Center Today
Don’t hesitate to contact an experienced lawyer at Church Law Center when you need assistance with legal issues related to your California church, religious organization, or nonprofit organization. You can reach our offices by calling (949) 892-1221 or contacting us online to learn more about how we can help. We offer a wealth of experience handling the unique legal issues that nonprofit and religious organizations routinely face.