http://online.wsj.com/article/SB10000872396390444549204578022201425205738.html
September 28, 2012
Is Your Political Donation Deductible?
It is the height of election season, and campaign spending is setting new records. As in previous cycles, most of the giving has come from individuals.
For those people, tax questions abound. For example, which donations to political causes and campaigns are tax-deductible? Which ones will be disclosed on the Internet--or reported to the Internal Revenue Service--and which will remain secret? Which could trigger a 35% gift tax?
A crazy quilt of federal tax and election laws makes simple answers elusive. "At best the rules are opaque, and at worst they're misleading," says Ellen Aprill, a professor at Loyola Law School in Los Angeles who studies the area.
The best approach, say experts, is to know the rudiments of this tricky area in order to identify the most effective donation strategies and avoid a few traps. Tax preparers lament that too many of their clients don't understand what is allowed and what isn't.
"I wind up tossing out a lot of deductions people think they're entitled to," says Don Williamson, an accountant in the Washington area who also heads the Kogod Tax Center at American University.
So far, the total disclosed spending on federal elections during this cycle already has topped a record $1 billion, more than double the amount at the same point in the 2008 cycle, according to the Center for Responsive Politics, a nonpartisan nonprofit that tracks the data. Some 850,000 people have contributed $200 or more, and at least 200,000 others are expected to, according to the CRP.
A CRP spokesman notes that the totals don't include large amounts of undisclosed spending by corporations, unions and individuals on federal elections, or sums spent on state elections.
Murky Rules
The main body of rules governing political donations is federal election law, a murky amalgamation of statutes that is interpreted and administered by the Federal Election Commission. It was enacted in the 1970s and revised since then, especially in the 2002 law sponsored by Sens. John McCain (R., Ariz.) and Russ Feingold (D., Wis.).
FEC rules apply to direct contributions to campaigns and parties and, in different ways, to political action committees, or PACs. They also govern so-called super PACs, which aren't supposed to coordinate with candidates, or contribute to them.
In general, donations to these organizations must be disclosed to the FEC, which publishes the information on its website. Donation amounts are often limited and aren't tax-deductible.
The other main body of law governing political giving is the one for nonprofit organizations, which is even more opaque at points. Several categories of nonprofits, including charities, "social welfare" groups and trade associations, are allowed to engage in political activities. But their tax treatment varies, and different types of groups are permitted to engage in politics in different ways.
For example, "public charities" such as the Heritage Foundation and the Nature Conservancy can't support or oppose candidates, but they can work to educate the public and can take positions on ballot initiatives. Contributions to them are usually tax-deductible as charitable gifts by individuals.
The rules are different for social-welfare nonprofits such as the Sierra Club, the Christian Coalition and Common Cause. Groups in this category can be far more politically active, but taxpayers' gifts to them aren't deductible.
As a result, many nonprofits come in pairs--one that is largely for education, and one that is more politically active. For example, there is the activist National Rifle Association (nondeductible) and the educational NRA Foundation (deductible). Or the American Civil Liberties Union (nondeductible) and the ACLU Foundation (deductible).
Contributions to nonprofits don't have to be disclosed to the public, but the IRS has to be told about nondeductible gifts over $5,000, according to an IRS spokesman.
The bottom line: There are many ways to give politically to candidates and causes, depending on how much you value deductibility, disclosure or avoiding potential tangles with the IRS. Here are more details about common types of political contributions.
Donations to campaigns, parties and certain PACs. Campaigns and parties are largely free to coordinate with one another. PACs are free to coordinate with other PACs but are severely limited in what they can donate to campaigns.
Donations by individuals of $200 or more in a year must be publicly disclosed to the FEC within as little as 20 days, depending the point in the election cycle. The FEC publishes on its website the donor's name, address, occupation and amount given.
Individuals may give up to $2,500 per election to a campaign, up to $5,000 a year to a PAC, and up to $30,800 a year to a national party committee. None of these contributions is tax-deductible, and they aren't reported to the IRS.
In general, campaigns, parties and PACs in this category can't accept contributions from nonprofits, corporations or unions--only from individuals and other PACs. These aren't the only limits; others are available at www.FEC.gov.
Examples of groups in this category include the Romney campaign, the Democratic National Committee, labor-related groups like SEIU COPE, and corporate-related PACs like the Honeywell Political Action Committee.
Donations to super PACs. The law says these groups may only make "independent expenditures" that aren't coordinated with spending by a candidate or political party, and they can't contribute to candidates. Groups that fit this bill include American Crossroads, which supports conservative candidates, and Priorities USA Action, which supports liberal ones.
Under two 2010 court decisions, such groups may accept unlimited amounts of money from individuals, unions or corporations, and their spending isn't restricted.
Donors to these PACs are public, but the giver's identity might be difficult to determine. People can route contributions through a company such as an LLC, or they can give to a social-welfare nonprofit that funnels gifts to them.
For example, the nonprofit FreedomWorks has given $2 million in this election cycle from anonymous donors to the super PAC FreedomWorks for America, which supports fiscal conservatives in federal elections. A legal adviser to FreedomWorks said the donation was for "overhead and start-up costs."
Contributions to these groups aren't tax-deductible and aren't reported to the IRS.
Donations to social-welfare nonprofits. These organizations, often called "c4s" because they are governed by tax code section 501(c)(4), are supposed to promote social welfare. That means they are allowed to lobby and may participate in campaigns and elections, but they can't contribute to candidates. Examples of c4 groups include Crossroads GPS, which supports conservative causes, and Priorities USA, which supports liberal ones.
Donations to c4 groups by individuals aren't tax-deductible and aren't disclosed to the public, but gifts of $5,000 or more must be disclosed to the IRS. In addition, many nonprofit experts say that under the law, donations to c4 groups are subject to gift tax. The current top gift tax rate is 35% if the donor has used up his lifetime exemption of $5.12 million; otherwise the gift uses part of the exemption if it's above $13,000 in a year.
Donors to groups in this category should be aware that some of them are highly controversial and have attracted congressional scrutiny. IRS rules about permitted political activities are vague, and critics say the format is open to abuse by groups that gather funds from anonymous donors on the left or right for hard-hitting political ads or to give to organizations such as super PACs. In other words, such groups are PACs in all but name.
Recent court decisions in effect have allowed corporations and unions to make unlimited donations to these groups. Although a c4's spending must be disclosed to the IRS, filings are often delayed, and some groups have a short life.
Earlier this month, top IRS official Steven Miller told lawmakers the agency is examining more than 70 c4 groups. He added that 1,600 others had applied for c4 status, but that for a number of them the "level of political activity is an issue." Experts expect this controversy will continue.
Dues to a nonprofit group such as a trade association. Many trade groups engage in political activity. Examples of these groups, which fall under section 501(c)(6) of the tax code, include the U.S. Chamber of Commerce, the National Association of Realtors, the American Petroleum Institute and the American Medical Association.
The good news is that membership dues paid to these groups are deductible by individuals or businesses, except for the portion applying to political spending. In general the groups notify members about the percentage of the dues payment that is disallowed.
For example, individual dues to the Chamber of Commerce are 45% deductible because of its lobbying, according to its website.
Such groups don't have to disclose their membership lists. Many trade groups also have PACs or super PACs that conduct political activities. For example, the National Association of Realtors has both the National Association of Realtors Political Action Committee and the National Association of Realtors Congressional Fund, a super PAC.
Donations to a nonprofit public charity. Not all charities are schools, hospitals or churches. They also include politically tilted groups under 501(c)(3) of the tax code whose primary function is to win the hearts and minds of the public with education. Some examples include the American Enterprise Institute, which aims to "expand liberty and strengthen free enterprise," and the Natural Resources Defense Council, an environmental action group.
Such groups can engage in policy discussion or support ballot initiatives without jeopardizing their tax-exemption. But they can't support or oppose candidates directly.
Donations to these groups are generally deductible if the groups send a letter confirming the gift and the amount. The group needn't report donations to the IRS unless the gift is 2% of total contributions or $5,000, whichever is greater, so most donors can be anonymous if desired.
--Email: taxreport@wsj.com