As we head into the final stretch of the presidential election cycle, employers — both for-profit and nonprofit — may wish to offer employee programs to encourage civic participation, including facilitating political contributions through payroll deduction plans.
Some corporate employers that sponsor affiliated political action committees offer to match an employee’s contributions to the company PAC with contributions to charities selected by the employee. While charity/PAC matching gift programs of this nature have been approved by the Federal Election Commission for election law purposes as recently as 2016, the IRS recently ruled that corporate taxpayers may not claim business expense deductions for expenses associated with these programs.
Tax deductions are generally not relevant to tax-exempt corporations. However, section 501(c)(3) employers do have to contend with the prohibition on political activity. Fortunately, the IRS has ruled that a charitable employer may establish a payroll deduction plan through which employees may contribute to PACs as long as employees may contribute to the PACs of their choice and the charity does not solicit or encourage contributions to any affiliated PACs.
No Business or Charitable Deductions for Company PAC/Charity Match Programs
Charity/PAC matching programs have long been allowed by the FEC (see, e.g., FEC MUR 6873, FEC Advisory Opinion 1989-7). However, when considering the costs of implementing such programs, companies should note that their program expenses are not tax-deductible as either business expenses or charitable contributions.
In a recent private letter ruling (PLR 201616002), the IRS concluded that a corporation could not take a business expense deduction for expenses associated with a charity/PAC matching program. Under the program at issue, the company matched each employee’s contributions to a company PAC with a contribution (in the employee’s name) to charities of his or her choice. Reasoning that the employee’s contributions to the PAC and the corporation’s matching contributions to a charity were “inextricably linked,” the IRS found that the matching contributions were “in connection with” a political campaign on behalf of a candidate for public office and therefore were not deductible business expenses pursuant to Internal Revenue Code section 162(e)(1)(B).
In prior guidance, the IRS has also opined that contributions made to charities under company PAC matching programs are not deductible as charitable contributions under section 170. (See GCM 39877 (8/21/92); Judith E. Kindell and John F. Reilly, “Election Year Issues,” 1993 IRS EO Continuing Professional Education Text, at 441.)
Business Expense Deductions Allowed for Broader Employer-Sponsored Civic Programs
The IRS has ruled that employers may deduct as ordinary and necessary business expenses the costs of administering programs intended to promote civic engagement and involvement in the political process. In a 1962 revenue ruling (Rev. Rul. 62-156, 1962-2 C.B. 470), the IRS considered corporate employers’ programs that included advertisements encouraging people to vote, paid time off to vote and a payroll deduction plan under which employees could contribute to “whatever political candidate, cause, or party the employee chose to designate.” In that ruling, the IRS reasoned that the business expense deductions were justified because, among other things, the expenses improved employee morale and enhanced the reputation of the employer.
Applying this 1962 revenue ruling, it stands to reason that if an employer set up a charity/PAC matching program that gave the employee the freedom to contribute to the PAC of his or her choice and was part of a broader civic engagement effort of the sort described in the revenue ruling, the expenses associated with the program would be deductible.
Payroll Deduction Plans for Charitable Employers
The IRS has ruled that a charitable organization may establish and fund a PAC payroll deduction plan for its employees without jeopardizing its tax-exempt status under section 501(c)(3) as long as: (i) employees are free to choose the PAC and (ii) the charitable employer is politically impartial in its actions. (See PLR 201127013.) In a 2011 private letter ruling, the IRS explained that under these conditions, contributions made through a charitable organization’s voluntary payroll deduction plan may include the option of contributing to PACs established by a section 501(c)(4) organization that is controlled by the 501(c)(3) charity, provided the charitable organization does not “solicit or encourage contributions to the affiliated PACs.” By contrast, the IRS has ruled that a section 501(c)(3) organization’s payroll deduction plan would result in political campaign intervention (and hence would jeopardize tax-exempt status) when the only PAC to which contributions were made was one selected and endorsed by the employer. (See TAM 200446033.)