Provided by:  Jennifer Kirschenbaum, Esq.

 March 21, 2023

Question:

Jennifer,

Thanks for last week's email on 501(c)s.   What happens when the 501(c) does devote its time to the tax exempt purpose?  

Thanks, Dr. P


Answer:

That's an easy one - by not adhering to the tax exempt purpose, the tax exempt status would be in jeopardy and perhaps back taxes will be owed.   Careful on the classification and use.   A 501(c) is not a vehicle to be played with as a tax avoidance strategy...  

Question:

Jennifer, 

The article mentioned 49% - is our  501(c)(6) limited to 49% of lobbying?  

Thanks, 



Question:

Hi Jennifer, 

Last week's email indicated a cap on lobbying activities at 49% for 501(c)(6)s.  Is that a thing? 

Thanks, 

Dr. L

Answer:

Correction - the 49% test is not hard line rule/requirement.    The overriding IRS document (https://www.irs.gov/pub/irs-tege/eotopick03.pdf) on 501(c)(6) states clearly the fundamental factors to qualify for a 501(c)(6). 

Basic To meet the requirements of IRC 501(c)(6) and Reg. 1.501(c)(6)-1, an Characteristics organization must possess the following characteristics: of an IRC 501(c)(6)

  1. It must be an association of persons having some common business Organization interest and its purpose must be to promote this common business interest;
  2.  It must be a membership organization and have a meaningful extent of membership support;
  3.  It must not be organized for profit;
  4. No part of its net earnings may inure to the benefit of any private shareholder or individual;
  5.  Its activities must be directed to the improvement of business conditions of one or more lines of business (discussed under “The ‘Line of Business’ Requirement,” page 21) as distinguished from the performance of particular services for individual persons;
  6. Its primary activity does not consist of performing particular services for individual persons; and
  7. Its purpose must not be to engage in a regular business of a kind ordinarily carried on for profit, even if the business is operated on a cooperative basis or produces only sufficient income to be self-sustaining.

IRC 6033(e) Options
An exempt organization subject to IRC 6033(e) has several options.

  • It may provide a notice that contains a reasonable estimate of the amount allocable to lobbying and political campaign expenditures to its members when they pay dues.
  • If it does not give notification, it must pay a proxy tax at the highest rate imposed by IRC 11 (currently 35 percent) on its lobbying and political campaign expenditures (up to the amount of dues and other similar payments received by the organization) during the taxable year.
  • In addition, if the organization does provide notices to its members but underestimates the actual amount of lobbying and political campaign expenditures, it is subject to the proxy tax on the excess lobbying expenditures paid during the applicable year that were not included in the notices.  However, this tax may be waived if the organization agrees to include the excess lobbying and political campaign expenditures in the following year's notices.
  • Notice vs. Proxy
    • Tax This mechanism allows a membership organization to elect not to provide its members with a disallowance notice in which case the organization will be required to pay the tax.
    • If an organization elects the proxy tax option, no portion of any dues or other payments made by members of the organization will be deemed nondeductible as a result of the organization's lobbying and political campaign activities.


Hope this is helpful! 
 
We are happy to assist you with this process.  Feel free to email or call me any questions to CWinters@kirschenbaumesq.Com or 516-747-6700 x. 308.