July 26, 2022

Three PAC Methodologies for Nonprofits

By Ariana N. Warren, CPA, Senior Manager, Tax & Business Services

Three PAC Methodologies for Nonprofits Nonprofit & Social Sector

November 2022 is coming and with it, the midterm elections. Election years often see a large number of organizations — including nonprofits — enter the political campaign space. There are three basic ways nonprofits can impact the elections this fall. Note that these options do not apply to organizations exempt under section 501(c)(3), which are strictly prohibited from engaging in political activities. However, public charities, a subsection of §501(c)(3), may engage in direct or indirect lobbying activities.

Option one

Create a separate legal entity known as a separate segregated fund (SSF) under §527(f)(3) to carry out political work on the organization’s behalf. A SSF is considered a separate political organization. It must have its own separate EIN and must file Form 8871 unless it meets one of the following exceptions:

  1. Is a committee of a state or local candidate;
  2. Is a non-federal PAC, not registered with the Federal Election Commission;
  3. Is a state or local committee of a political party, or;
  4. Will receive less than $25,000 in gross income during any tax year.

Note that the SSF’s activity is consolidated into the reporting entity’s Form 990. SSFs may only fundraise from members of the connected nonprofit.

Option two

Non-501(c)(3)s can directly engage in political activity. The reporting entity is liable for taxation on these activities, but no Form 8871 is required. Further, organizations such as 501(c)(4)s may dedicate a majority of their activities to causes other than politics. These nonprofits must carefully monitor the portion of their activities and expenses spent on political activity versus overall exempt mission activities.

Option three

Start or partner with a non-connected §527 PAC to perform the activity. Funds can be sent to a PAC without a connection to the reporting entity, which shifts both compliance and recordkeeping burdens to others. This option allows the reporting entity to stay focused on its exempt purpose. Non-connected PACs may fundraise from the general public rather than from members alone.

Note that all §527 organizations potentially pay an income tax on net investment income, which requires a Form 1120-POL if income is over $100. When 501(c) organizations file the 1120-POL to report their own political activity, the tax is imposed on either the lessor of the reporting entity’s net investment income or exempt function political expenses. Filers of the 1120-POL currently pay the 21% flat corporate rate.

Nonprofits may throw their hats into the political ring this November. Be certain you are choosing the correct path to conduct political campaign activities and be mindful of the administrative and compliance hurdles imposed on such organizations. If you need support for your nonprofit’s plans for electioneering, please reach out to the Marcum nonprofit tax group.