Political Campaigns: Tax Returns And Transparency

Political campaigns are subject to tax under IRC section 527 and may have filing requirements. This includes campaign committees for candidates for federal, state, or local office, as well as political parties and political action committees. While charitable donations are generally tax-deductible, any donations made to political organizations or candidates are not. This includes donations of time or effort, as well as money. Businesses also cannot deduct political contributions on their tax returns.

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Political organisations are taxed on their taxable income

The taxable income of a political organisation is calculated by taking its gross income and subtracting any deductions that are directly connected with producing that income. This includes any "exempt function income", which is income set aside for use for an exempt function, such as contributions of money or property, membership dues, fees, or proceeds from political fundraising events or the sale of campaign materials.

The tax is then calculated by multiplying the taxable income by the highest rate of tax specified in Section 11(b) of the tax code. The tax is paid using Form 1120-POL, U.S. Income Tax Return for Certain Political Organisations.

It is important to note that political organisations must also comply with other tax requirements, such as obtaining an employer identification number (EIN) and filing periodic reports electronically with the IRS using Form 8872. These organisations are also subject to employment taxes and must comply with solicitation notice requirements under IRC Section 6113.

Donations to political campaigns are not tax-deductible

Political campaigns are subject to tax under IRC section 527. This includes campaign committees for candidates for federal, state, or local office, and political action committees.

The IRS provides a clear distinction between political and charitable donations. Charitable donations are generally tax-deductible, whereas political donations are not. Charitable donations refer to gifts made to organizations that qualify under Section 501(c)(3) of the Internal Revenue Code. However, it is important to note that not all nonprofits are charities. For example, nonprofit advocacy groups like the American Civil Liberties Union have a 501(c)(4) designation and cannot receive tax-deductible donations because they may engage in political activity.

While political contributions are not tax-deductible, they are still subject to certain regulations and reporting requirements. The Federal Election Commission (FEC) limits how much individuals can contribute to federal candidates and political committees. For instance, during the 2024 election cycle, the donation limit to a candidate was $3,300 per election, per candidate.

Political organisations must file periodic reports

Political organisations, including political parties, campaign committees for candidates for federal, state, or local office, and political action committees, are subject to tax under IRC Section 527. These organisations are required to file periodic reports with the IRS.

To be subject to tax under IRC Section 527, a political organisation must have its own employer identification number (EIN), even if it does not employ anyone. To obtain an EIN, an organisation must file Form SS-4, Application for Employer Identification Number.

Most tax-exempt political organisations must file periodic reports on Form 8872 with the IRS. Form 8872 is the Political Organisation Report of Contributions and Expenditures. To file electronically, the organisation must have the username and password it received from the IRS after filing its initial notice (Form 8871).

The requirement to file Form 8872 electronically was introduced by legislation that amended IRC Section 527(j) for periods beginning on or after January 1, 2020.

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Political organisations are subject to tax under IRC Section 527

Political organizations are subject to tax under IRC Section 527. This includes political parties, campaign committees for candidates for federal, state, or local office, and political action committees (PACs). These groups are considered "527 organizations" and are identified as such in their tax filings with the IRS.

To be exempt from federal income tax, these political organizations must electronically file a notice of their Section 527 status (Form 8871) with the IRS. They are also generally required to file periodic reports (Form 8872) with the IRS, disclosing their contributions and expenditures. It is important to note that not all 527 organizations are federally registered political committees, but all political committees that register and file reports with the Federal Election Commission are considered 527 organizations.

The tax imposed on political organizations under Section 527 is based on their taxable income, which is calculated as the excess of their gross income over any exempt function income. This taxable income is then multiplied by the highest rate of tax specified in Section 11(b) to determine the amount of tax owed. Additionally, certain proceeds, such as those from conducting bingo games, are treated as exempt function income and are not considered taxable income for the organization.

While political organizations themselves are subject to tax under Section 527, it is important to note that donations made to these organizations by individuals or groups are generally not tax-deductible. This includes monetary donations, in-kind contributions, and volunteer expenses. However, donations made to qualified nonprofit charitable organizations may be tax-deductible, including out-of-pocket expenses related to volunteering for such organizations.

Taxable income includes exempt function income

In the context of tax-exempt social clubs and homeowners' associations (HOAs), taxable income does include exempt function income.

Tax-Exempt Social Clubs

The Internal Revenue Service (IRS) defines exempt function income for tax-exempt social clubs. However, it is unclear from the sources whether taxable income includes exempt function income in this context.

Homeowners' Associations (HOAs)

HOAs are required to meet specific criteria to be considered tax-exempt organisations. According to the Tax Reform Act of 1976, 60% or more of an HOA's annual gross income must be exempt function income for it to qualify as a tax-exempt HOA. Exempt function income, in this case, includes "membership dues, fees, or assessments" paid by the residential owner-members of the HOA. It also includes interest, fines, penalties, and late fees received from members for breaking HOA rules or paying dues late.

On the other hand, non-exempt function income for HOAs includes fees for the temporary use of facilities such as a pool or tennis court, paid by both members and non-members. Additionally, advance payments made by members, such as when a member pays two years' dues in advance, are considered exempt function income in the year to which they apply.

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