One of the often-overlooked changes in the recent tax reform bill is the repeal of the deduction for local lobbying expenses. Previously, federal and state lobbying expenses were not deductible, but local lobbying expenses were. As a result, companies should review their lobbying expenses in light of the changes.
IRC Section 162(e) disallows deductions for certain federal, state, and local lobbying and political expenditures, including amounts paid or incurred in connection with:
- Influencing legislation
- Campaigning on behalf of any candidate for public office
- Attempting to influence the general public with respect to elections, legislative matters, or referendums
- Communicating directly with a covered executive branch official in an attempt to influence the official actions or positions of such official
An employee or third-party consultant being a registered lobbyist is not indicative of the deductibility of amounts paid to the individual. Therefore, companies should take a closer look to determine how much time third parties and internal employees spend on nonlobbying (deductible) versus lobbying (nondeductible) activities.
The costs generally allocable to lobbying activities include amounts paid to third parties for lobbying activities conducted on a company’s behalf, internal labor costs properly allocable to lobbying activities, and general and administrative costs properly allocable to lobbying activities.
Treasury Regulation Section 1.162-29 provides additional guidance for determining whether an activity constitutes influencing legislation:
“Influencing legislation” includes:
- Any attempt to influence any legislation through a lobbying communication
- All activities with the purpose of making or supporting a lobbying communication, even if the communication has not yet been made, including research, preparation, planning, coordination, and deciding whether to make a lobbying communication
A “lobbying communication” includes:
- Any communication with any member or employee of a legislative body or any government official or employee who may participate in the formulation of the legislation that refers to specific legislation and reflects a view on that legislation or clarifies, amplifies, modifies, or provides support for views reflected in a prior lobbying communication
- Any action with respect to acts, bills, resolutions, or other similar items made by a legislative body
- Specific legislation, which includes a specific legislative proposal that has not been introduced in a legislative body
“Legislative bodies” are:
- Congress, state legislatures, and other similar bodies, but not including executive, judicial, or administrative bodies
The definitions, rules, and examples outlined in the regulations provide a fairly narrow scope of activities that would be defined as influencing legislation. Examples of activities that do not influence legislation include:
- Testifying before a congressional oversight hearing in favor of a regulator proposal without referring to any specific legislation
- Sending a letter to a state agency providing detailed proposed rules relating to the implementation of a specific piece of legislation without referring to or reflecting on a view made on any specific legislation
- A taxpayer submitting a proposal to a state authority to acquire a specific piece of property for a park, even if acquiring the park would require legislative approval, as long as the proposal does not reference any specific legislation
- Preparing a position paper suggesting that a state should take specific actions to increase capital investment in the state without referring to or expressing a view on any specific legislation
These examples provide additional insight into nonlobbying activities performed by individuals, whether or not such individuals are registered lobbyists. Therefore, provided a lobbying communication to influence legislation is not also made, common activities performed by registered lobbyists – such as educating the public on specific issues, researching the effects of legislative issues, and advising regulatory agencies on previously enacted legislation – are deductible under IRC Section162. In addition, there is a de minimis exception to the disallowance for in-house lobbying expenses that do not exceed $2,000 during the tax year.
Given the change in the tax law, it is critical to understand which activities are considered lobbying and which are not in order to maximize the deductible portion of costs incurred.