One of the primary goals of many trade associations is to attempt to influence public policy that is favorable to the association’s members. However, the Federal Election Campaign Act (FECA) places strict limits on how a not-for-profit organization, such as a trade association, may use its resources to support political activities. In order to serve its members by supporting certain political activities but not violate FECA, a trade association might make contributions to the campaigns of political candidates and parties through Political Action Committees (PACs).

In a common example, a trade association may form a PAC that is created as a subsidiary of the association. The trade association may solicit contributions to the PAC from its members, subject to certain limits, and it may be active in managing the PAC. However, the PAC is created as a separate legal entity with its own organizing documents, bylaws, tax exemption, and federal identification number. Under GAAP, the results of the PAC may be required to be consolidated with the results of the trade association for financial statements presentation, if the criteria for consolidation under GAAP are met. However, a PAC is generally required to file its own separate tax returns.

PACs are generally considered to be tax exempt organizations by the IRS. Upon formation, a PAC may be required to file a Form 8871 – Political Organization Notice of 527 Status. Trade associations must use Form 8871 to notify the IRS that the organization is to be treated as a tax-exempt section 527 organization. In addition, if certain requirements are met, the PAC may be periodically required to file a Form 8872, which reports political contributions accepted and political expenditures made. Also, the PAC may be required to file an annual form 990 or 990-EZ (including required schedules) if gross receipts exceeds certain thresholds. Finally, if the PAC has investment income, it may also need to file a form 1120-Pol, and potentially pay excise tax of up to 35% on the net investment income.

It is important to note that all of these forms have different filing requirements and different due dates. You should consider consulting with your tax advisor if you have any concerns about your organization’s compliance with these filing requirements. Despite the legal and filing requirements, many trade associations find that the creation of a PAC is a good way of serving its members’ interests while adhering to the requirements of FECA.

For more information on trade associations and political action committees, or for questions, contact Barb Miller at [email protected] or call her at 312.670.7444. Visit orba.com to learn more about our Not-For-Profit Group.