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Special report: Clinton's tax bill.

The impact on dues deductibility. More than 3,000 associations and their members have succeeded in changing some of the more onerous provisions of the Clinton administration's proposal to eliminate the tax deductibility of lobbying expenses. The compromise language is contained in the Omnibus Budget Reconciliation Act of 1993 signed into law August 10. Effective Jan. 1, 1994, lobbying expenses will no longer be deductible for federal income tax purposes. Dues paid to associations also will not be deductible to the extent of associations' lobbying expenditures. In general, a percentage of each member's dues will be declared not deductible based upon the relationship of the total dues income of the association to the association's total lobbying expenditures. Associations will be required to advise members at the time of dues collection what portion of dues is not deductible, and associations will be required to report annually to the Internal Revenue Service (IRS) regarding total lobbying expenditures and dues nondeductibility.

* Definition of lobbying. Under the law, lobbying is defined as "any attempt to influence federal or state legislation through communication with any member or employee of a legislative body or any government official or employee who may participate in the formulation of legislation." Lobbying also includes participation or intervention in a political campaign (it is not yet clear whether this includes an association's contribution to its political action committee for overhead and administrative expenses), grass-roots lobbying, and direct communication with certain high-ranking federal executive branch officials in an attempt to influence any official actions. Note that communication with state administrative officials, other than on legislative matters, is not defined as lobbying. Finally, lobbying expenditures include any amounts paid or incurred (including a "reasonable" allocation of labor costs, overhead costs, and so forth) for research, preparation, planning, or coordination of any lobbying activity.

* New tainting rule. While mere monitoring of legislation (and informing your members of the same) is not considered lobbying, if and when the monitoring turns to advocacy (including urging your members to contact their members of Congress), all of the previous monitoring (of the same or similar legislation) is "tainted," with all of the monitoring expenses becoming nondeductible. Questions as to the scope of this rule, how far back in time it reaches, and so forth will likely be answered by the IRS regulations.

* 501(c)(3) exemption. All 501(c)(3) organizations are exempt from the law, with one exception: A contribution to a 501(c)(3) group is not deductible if the organization engages in lobbying of direct financial interest to the donor's business and a principal purpose of the donation is to avoid the nondeductibility rule that would otherwise apply to the donor.

* Local lobbying exemption. "Local" lobbying is exempt, with the present-law requirement remaining that the lobbying must be of "direct" interest to the association and its members to be deductible.

* Nondeductible dues determination. The percentage of association member dues nondeductibility is determined by comparing an association's dues income (including voluntary payments to associations and special assessments imposed by associations to conduct lobbying) with its lobbying expenditures.

* Allocation of lobbying expenses. Lobbying expenditures for a given taxable year are to be allocated to the dues received during that year. Any "excess" amount of lobbying expenditures is to be carried forward and allocated to dues received in the following taxable year.

* Reporting requirements. For each taxable year, associations must report to the IRS on the Form 990 their total lobbying expenditures and the total amount of dues to which such expenditures are allocable. In addition, as part of their annual dues assessments, associations must provide members with "reasonable" estimates of the portion of their dues that will not be deductible for the coming year. This notification requirement extends to all voluntary payments to associations and special assessments by associations. Notification must be made at the time of payment or assessment.

* Estimated versus actual lobbying expenses. If an association's actual lobbying expenses for a year exceed the estimate provided to members, the association must either pay the proxy tax on the excess amount or seek permission from the IRS to roll over the expenses to the following year.

* Proxy tax option. This alternative permits associations to pay taxes on lobbying expenses directly--at the highest corporate rate (currently 35 percent)--to avoid the administrative burden and disclosure requirements to members. The tax will only be levied on lobbying expenses up to the total dues income for that year, with "excess" expenses carried forward to the following year.

* Two safe harbors. First, the law exempts certain in-house expenditures totaling less than $2,000. For purposes of this de minimis rule, in-house expenditures are "lobbying costs other than payments to outside lobbyists or other organizations that lobby or expenses for grass-roots lobbying, electioneering, or foreign lobbying (these costs do not qualify for exemption)." Overhead expenses that would otherwise be allocable to lobbying are not counted when calculating the de minimis amount. Thus, if in-house lobbying expenses do not exceed $2,000, these expenses (plus the allocable overhead) are exempt; if such expenses exceed $2,000, then all of the expenses (including the $2,000) are not deductible.

Second, if your organization receives 90 percent or more of its dues from individuals not entitled to deduct their dues (even if lobbying is not involved), the organization is exempt from the nondeductibility rules. It is not yet clear how associations will have to go about establishing their qualifications for the waiver--presumably they will do it by surveying their members or by other such means.

* Penalties. Any association that underreports the total amount of its lobbying expenses is required to pay the proxy tax (at the highest corporate rate) on the underreported amount. This penalty applies whether the association elects to disclose dues nondeductibility to its members or to pay the elective proxy tax. The penalty is imposed in addition to any interest and penalties under existing law.

* No membership list disclosure required. Unlike earlier versions of the law, the final law does not require associations to provide the IRS with membership lists, addresses, or individual dues amounts.

Additional implications. A number of other tax bill provisions, including the following, affect associations.

* Change in business meal and entertainment deductibility. The new law reduces the deductible portion of otherwise allowable business meal and entertainment expenses from 80 percent to 50 percent. The provision is effective for taxable years beginning after Dec. 31, 1993.

* Cap on retirement benefits. The amount of a participant's compensation that can be taken into account under a tax-qualified pension plan is limited. The compensation limit applies for determining the amount of an employer's deduction for contributions to a tax-qualified pension plan and the amount of the participant's benefits. The limit for 1993 is $235,890. The new law reduces the amount that can be taken into account under a tax-qualified plan to $150,000 (indexed for inflation in $10,000 increments). The provision is effective for benefits accruing in plan years beginning after Dec. 31, 1993.

* Spousal travel nondeductibility. The new law denies a deduction for travel expenses paid or incurred with respect to a spouse, dependent, or other individual accompanying a taxpayer on business travel unless that travel companion is a bona fide employee of the taxpayer paying or reimbursing the expenses, the companion's travel is for a bona fide business purpose, and the companion's expenses are otherwise deductible. The denial of the deduction does not apply to expenses that otherwise qualify as deductible moving expenses. The provision is effective for amounts paid or incurred after Dec. 31, 1993.

* Extension of the employer-provided educational benefits exclusion. Prior to July 1, 1992, an employee was generally allowed to exclude from gross income up to $5,250 paid by his or her employer for educational assistance. This educational assistance payment was also excluded from wages for employment tax purposes. The exclusion expired June 30, 1992. The new law extends the exclusion from July 1, 1992, through Dec. 31, 1994.

* Permanent charitable contribution deduction limitation. Under present and prior law, individuals who do not elect the standard deduction may claim itemized deductions for certain expenses, including charitable contributions. Certain of these deductions are allowed only to the extent that the amount of the deduction exceeds a percentage of a taxpayer's adjusted gross income. In addition, the total amount of otherwise allowable itemized deductions is reduced by 3 percent of the amount of the taxpayer's adjusted gross income of more than $108,450 in 1993 (indexed for inflation). Otherwise allowable itemized deductions may not be reduced by more than 80 percent. Under prior law, this limitation was set to expire Dec. 31, 1995. The new law permanently extends the limitation on itemized deductions.

Actions for associations. ASAE opposes the loss of lobbying tax deductibility and, along with an association coalition, is working for repeal of the legislation. In addition, ASAE plans to actively participate in the drafting of the IRS regulations necessary to implement the legislation and is pursuing other courses of action, including a full exploration of the constitutional issues presented by the legislation. ASAE is currently preparing a legal analysis of the new law. For a detailed analysis of the lobby tax provision or to join the ASAE-led Lobbying Deduction Coalition, call ASAE Government Affairs, (202) 626-2703.

Flood relief. The National Association of Broadcasters, Washington, D.C., staged a telethon--raising $5.5 million for assistance to Midwesterners harmed by this summer's flood disaster. The Illinois Farm Bureau, Bloomington, coordinated a farmer-to-farmer relief network. These efforts are but two examples among hundreds of association flood-relief initiatives. Look for more examples in a future ASSOCIATION MANAGEMENT. If your association provided assistance, fax a brief description to ASAE Public Relations, (202) 408-9633.

Beware of Florida's publishing tax. If your association mails magazines, newsletters, newspapers, or similar documents to members in Florida, you may be required to remit a 6 percent sales tax. Under recent Florida legislation, nonprofit organizations are exempted from back taxes for the period from July 1, 1987, to July 1, 1993--provided those nonprofit organizations did not collect sales taxes on their publications and the costs of the publications were imputed in membership dues. The exemption does not apply to associations that sold subscriptions to nonmembers in Florida or extra copies to members in Florida during that time. Under certain circumstances outlined in the law, as of July 1, 1993, associations with members in Florida were to register with the Florida Department of Revenue as sales tax dealers and to collect sales taxes on circulation of publications in Florida. The tax was signed into law in 1987 as part of the Florida service tax. Because that legislation continues to face legal challenges, ASAE urges members to call ASAE Government Affairs, (202) 626-2703, for information about compliance.

Pickle panel probes charity expenditures. The House Ways and Means Subcommittee on Oversight last month held the second in a series of hearings to look into what subcommittee chair J.J. Pickle (D-TX) described as "questionable" activities by some public charities. "The public has a right to have confidence that charities are spending their tax-deductible contributions in a worthwhile manner," said Pickle, who cited one charity that "paid $200,000 for its executive director's wedding reception." According to Pickle, one possible measure would require nonprofit organizations to provide more details to the Internal Revenue Service on their Forms 990 and 990-T. For more information, call (202) 626-2703.

Senate passes postal reform. The Treasury, Postal Service, and General Government Appropriations Bill passed last month by the Senate included language to address the ongoing postal-revenue-forgone problem. For more information, call (202) 626-2703.
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Title Annotation:This Just In ...; Omnibus Budget Reconciliation Act of 1993
Publication:Association Management
Date:Sep 1, 1993
Previous Article:Turning technical experts into expert speakers.
Next Article:Leadership: strengthening the team at the top.

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