I posting this to Usenet in case someone would find it useful.
I wrote up this advice to a 501(c)(4) on the implications of making political expenditures. This concerns Sec. 527, a tax code section I dislike for the use of names of tax terms that are meaningless on their face or suggest the opposite of their definitions.
Note that a separate segregated fund from which political expenditures are made could be treated like a political organization and would prevent the funds in the main treasury from being subject to tax.
I would recommend against making political expenditures from the main treasury of a 501(c)(4) if that means the 501(c)(4) would be treated as having political organization taxable income. A return is filed on Form
1120-POL. There is a 21% tax.
Making political expenditures are not against tax code. Since it's not a
501(c)(3), there would be no tax penalty. As long as it is organized primarily to promote social welfare, it can make limited political (exempt function) expenditures and still be "organized as" a 501(c)(4) social welfare organization.
For the purpose of the tax code, an exempt function is various kinds of political activity, includes making a political expenditure.
The exempt function (of an organization that is not political organization) is a political expenditure. An organization that is not a political organization that makes a political expenditure has now made an expenditure of "any amount" for an exempt function.
Note that income comes before the expenditure. An equivalent amount of income to the expenditure is exempt function income.
With exempt function income, an organization that is not a political organization now has political function taxable income and would file return on 1120-POL. It's the lesser of net investment income or the aggregate exempt function expenditure. There is a specific deduction of $100. It's subject to a 21% tax.
The remaing paragraphs quote guidance in Pub, 557.
Exempt function. An exempt function means influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any federal, state, local public office or office in a political organization, or the election of the Presidential or Vice Presidential electors, whether or not such individual or electors are selected, nominated, elected, or appointed. It also includes certain office expenses of a holder of public office or an office in a political organization.
Political organization taxable income. Political organization taxable income is the excess of:
- Gross income for the tax year (excluding exempt function income) minus
- Deductions directly connected with the earning of gross income.
To figure taxable income, allow for a $100 specific deduction, but don't allow for the net operating loss deduction, the dividends-received deduction, and other special deductions for corporations.
Exempt organization not a political organization. An organization exempt under section 501(c) that spends any amount for an exempt function must file Form 1120-POL for any year in which it has political taxable income. These organizations must include in gross income the lesser of:
- The total amount of its exempt function expenditures, or
- The organization's net investment income.