Politics, taxes, and your business

By Jerry Meek

If you run a business, there are a few things you should know about politics and taxes.

1. There’s no bad debt deduction for debts owed by political organizations.  Accrual method taxpayers are accustomed to reporting income when earned, regardless of when they actually get paid.  If, in a later tax year, they don’t get paid, they are generally allowed a bad debt deduction.  But, under I.R.C. § 271, if you provide goods or services to a political organization (including a political party or any committee which attempts to influence an election) and the organization doesn’t pay up, a bad debt deduction is disallowed.  There is an exception if more than 30% of your receivables come from such organizations and you make continuing efforts to collect on the debt.  And, obviously, cash method taxpayers need not be concerned, since they report income only when the bill is paid.  The obvious policy rationale behind this rule is to prevent people from converting otherwise non-deductible political contributions into tax deductions.  But the unaware can get hit twice – once when the customer fails to pay up and again when the IRS disallows a deduction on the bad debt.

2. Political expenses are not deductible.  Almost every business owner knows that “ordinary and necessary” business expenses are deductible.  What if your business buys an ad in a political program or a ticket to a political event?  Is this deductible if the expense is incurred to promote your business?  Under a special provision of Internal Revenue Code, it is not.  I.R.C. § 276 disallows a deduction for such “indirect contributions,” including expenses for:  (1) advertising in a publication if part of the proceeds supports a party or candidate; (2) admission to any dinner or program if part of the proceeds support a party or candidate; or (3) admission to a gala, parade, concert, or “similar event” if “identified with” a party or candidate.

3. Most – but not all – lobbying expenses are not deductible.  Let’s say that whether your business thrives or struggles depends on what happens with a particular bill in Congress or the State Legislature.  Can you deduct any expenses incurred in lobbying for or against the bill?   No you can’t.  Under I.R.C. § 162(e), no business deduction is allowed for expenses incurred in connection with influencing legislation, attempting to influence the public on legislative matters, or directly communicating with certain executive branch officials in an attempt to influence official actions.  There are three important exceptions to the rule.  First, the rule doesn’t apply to “local legislation.”  So, for example, if you spend money trying to lobby the City Council on a zoning issue, this is fully deductible (provided it meets the other requirements for a business deduction).  Second, if someone in-house does the lobbying, you can continue to deduct that person’s full salary, provided that the amount attributable to lobbying does not exceed $2000 in any taxable year.  Finally, if you are in the business of lobbying, the rule obviously doesn’t apply.

4. Illegal bribes or kickbacks to government employees are not deductible.  There are a lot of reasons why you shouldn’t pay bribes or kickbacks to government employees.  There are criminal sanctions for doing that, regardless of whether the official or employee is here in United States or in a foreign nation.  But if that’s not a sufficient deterrent, I.R.C. § 162(c) disallows a deduction for any such payments made.  The regulations provide one example:  a company in the business of selling hospital equipment hires a moonlighting employee whose full time job is Superintendent of Hospitals.  If done to procure an improper advantage in violation of state law, the employee’s salary is not deductible.