Recently, the Treasury Department and the IRS has proposed to spell out specific activities for the 504(c)(4) organizations that are considered to be political. The intention of this proposal is to reduce the financial influence that political lobbyists can exert on political campaigns by hiding behind the tax-exempted non-profit organizations.
As a CPA, I am surprised it takes the IRS this long to make such a proposal. As most taxpayers know, any expenses spent on political lobbying is not tax deductible. But contributions to civic leagues or other section 501(c)(4) organizations, while generally are not deductible as charitable contributions for federal income tax purposes, they may be deductible as trade or business expenses, if ordinary and necessary in the conduct of the taxpayer’s business. (This is where it gives a lot of flexibilities to the political lobbyists to fund their politicians buddies.)
Under the current rule, companies and wealthy individuals can donate lots of money to these 504(c)(4) organizations and receive huge tax deduction while financially supporting certain political candidates they affiliate with. On their books, it's usually under the "advertising and corporate sponsorships" or "marketing" expenses to promote their products or services" to the communities blah blah.
In my opinion, this practice allowed under the current law is unjust. The more tax deduction the companies and wealthy individuals pay, the more the IRS need to either cut my future social security benefits or increased my current income tax, which it already did. The more financial influence big money can exert on politicians, the more the system is going to be skewed to benefit the big money at the expense of little me.
As a CPA, I welcome this new proposal from the IRS. But even if this proposed new rule is passed, it will only be effective if only CPAs and auditors who are advising these heavily politically involved 501(c)(4) organizations and their donors, are competent and ethical enough to advise their clients against misclassifying and misallocating political donations as non political expenses on social causes. In my career as an auditor, I had seen CPAs liberally classify a lot of non-deductible expenses as deductible; many are so outrageously misclassified that I can't believe my own eyes . Making sure that donations are classified properly are much more difficult than just proposing a new law.
