Corporation May Not Deduct Matching Contributions to its PAC

May 16, 2016

In a recent private letter ruling LTR 201616002, the IRS responded to a request for ruling as to whether contributions made by the taxpayer pursuant to a political action committee charity match program were deductible as ordinary and necessary business expenses.

The taxpayer was a corporation that would be prohibited by the Federal Election Campaign Act (FECA) from contributing to federal election campaigns. Therefore, the corporation established a Political Action Committee (PAC) which is funded by the employees of the corporation and its subsidiaries. The PAC was a political organization exempt from taxation under Section 527 of the Code. To incentivize employee contributions, the corporation would match each of these contributions and they requested a ruling on whether these matching amounts were deductible as ordinary and necessary business expenses.

The IRS stated that under current section 162 (e)(1)(B), amounts paid or incurred in connection with participation in, or intervention in, any political campaign on behalf of (or in opposition to) any candidate for public office are not deductible under Section 162. They determined that, in this case, the contributions to the PAC and the matching contributions were inextricably linked. The contributions to the PAC were a prerequisite for the corporations matching contributions and these matches were intended to incentivize contributions to the PAC. Applying the applicable section noted above and case law, the service concluded that the corporation’s matching contributions are “in connection with”  a political campaign for public office and are not deductible under Section 162. As with any Private Letter Ruling, the ruling is  only directed to the taxpayer, however they are often used as a guideline for the IRS view on a situation.

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