Proxy Tax Background
The Internal Revenue Code section 6033(e), imposes reporting and notice requirements on certain tax-exempt organizations described in sections 501(c)(4)social welfare organizations that are not veterans' organizations, 501(c)(5)agricultural or horticultural organizations that are not labor organizations, and 501(c)(6) organizations, that incur nondeductible lobbying and political expenditures. Non deductible lobbying and political expenditures are described in section 162(e), and include expenditures paid or incurred in connections with:
- Influencing legislation;
- Participating or intervening in any political campaign on behalf of (or in opposition to) any candidate for public office;
- Attempting to influence the general public with respect to elections, legislative matters, or referendums; and
- Any direct communication with a covered executive branch official in an attempt to influence the person's official actions or positions.
Organizations that do not provide notices of amounts of membership dues allocable to non deductible lobbying expenditures are subject to proxy tax under IRC section 6033(e)(2) on the amount of the expenditures. The tax rate is 35% that is reported on Form 990-T, Unrelated Business Income Tax Return.
However, if the organization meets Exception 1 or 2, it is excluded from the notice, reporting, and proxy tax requirements of section 6033(e).
Exception 1: Organization establishes to the satisfaction of the IRS that substantially all the dues or similar amounts they receive are not deducted by its members as business expenses.
Exception 2: Organization whose lobbying and political expenditures consist solely of in-house lobbying expenditures that do not exceed $2,000.
Proxy Tax Calculation
- Total dues, assessments, etc received
- Lobbying expenses paid or incurred
- Lesser of line 1 or line 2
- Less: Total nondeductible amount of dues notices
- Taxable amount of lobbying expenses (subtract line 4 from line 3)
- Proxy tax rate of 35%
- Proxy tax (multiply line 5 by line 6)