As those in the U.S. enter tax season, now is a good time to review and ensure company PACs are in compliance with federal tax law. As organizations that primarily engage in political activities, PACs are generally tax-exempt under Section 527 of the Internal Revenue Code, though engaging in nonexempt functions (such as payments diverted for the personal use of a candidate) may incur tax obligations. To maintain this tax-exempt status, PACs must be mindful of federal tax filings, which contain varied requirements depending on the registration status and activities of the entity. Failing to properly register and report under the tax code jeopardizes tax-exempt status, possibly resulting in income tax payments at the highest corporate rate and further penalties.
While many PACs are exempt from most or all of these filings, potentially required filings include:
- Registration with the Internal Revenue Service (IRS) as a Section 527 organization (Form 8871)
- Periodic reporting as a Section 527 organization (Form 8872)
- Disclosure of certain taxable income (Form 1120-POL)
- Tax returns for an organization exempt from income taxes (Form 990)
Below, we outline when federal PACs and state or local PACs incur such obligations:
Federal PACs
Federal PACs with more than $100 in taxable income in a calendar year must file Form 1120-POL and pay any taxes on such income. If required, Form 1120-POL is due the 15th day of the fourth month after the end of the tax year (generally April 15). Most often, this reportable income is from bank interest or investments. Otherwise, PACs registered with the Federal Election Commission (FEC) under the Federal Election Campaign Act (FECA) are exempt from filing Form 8871, Form 8872 and Form 990.
Please note, federal PACs registered with the FEC that use separate accounts for their state and local activities must register the nonfederal account with the IRS, as discussed below.
State and Local PACs
A state or local PAC that properly registers and reports pursuant to applicable state election law is generally exempt from reporting using Form 8872, but not from registering on Form 8871. In addition, depending on the scope of the PAC’s activities, the PAC may need to file Form 1120-POL or Form 990.
Form 8871
Form 8871 serves as a registration with the IRS. A state or local PAC must electronically file a Form 8871 with the IRS within 24 hours of organization if the entity expects to have annual receipts of $25,000 or more. If the PAC did not reasonably anticipate crossing the $25,000 threshold when it was established, it must file the form within 30 days of receiving $25,000 in gross receipts in a calendar year.
Form 8872
Form 8872 serves as a regular report of financial activity with the IRS. A state or local PAC required to file Form 8871 is exempt from filing an annual Form 8872 report if it is registered under state law as a PAC and files publicly disclosed campaign finance reports similar to those required under federal law (a “qualified state or local political organization”). The exemption is not available to the extent a federal candidate or officeholder materially participates in the direction or disbursements of the state or local PAC or, with prior knowledge or consent of the state or local PAC, solicits contributions to the PAC.
If required, the reports will be due on the same schedule for PACs as under FECA, meaning semiannually in nonelection years and quarterly in election years, plus pre- and post-election reports, with a monthly filing option. These reports are filed electronically.
Form 1120-POL
As with federal PACs described above, if a state or local PAC receives more than $100 in taxable income in a calendar year, the PAC must file Form 1120-POL and pay any taxes on such income. This filing is due the 15th day of the fourth month after the end of the tax year (generally April 15).
Form 990
A tax-exempt political organization must file Form 990 if it triggers Form 8871 and had gross receipts of $25,000 or more in a taxable year. However, a state or local PAC exempt from filing Form 8872 must file Form 990 only if it had gross receipts of $100,000 or more. Form 990 is due by the 15th day of the fifth month after the organization’s accounting period ends.
For further information or for help completing filing obligations, please contact us.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.