What expense category is Lobbying Expenses?

Businesses often engage in activities to influence legislation and public policy that may affect their operations. These activities, known as lobbying, come with specific costs, from hiring professional lobbyists to paying dues to trade associations. However, unlike most ordinary business costs, the IRS has very strict rules that make nearly all lobbying expenses non-deductible.

For accountants and business owners, it is crucial to accurately identify these costs to prevent them from being improperly claimed as business expenses. This guide will break down the IRS rules on lobbying, explain what is and isn't deductible, and show how to track these expenses for compliance.

The Lobbying Expenses Category

Lobbying expenses are not a deductible business expense category. IRS Publication 535 states that you generally cannot deduct amounts paid or incurred for lobbying activities.

These costs should be carefully segregated in your accounting system to ensure they are not mixed with deductible expenses, such as advertising or legal fees. On a company's books, they should be tracked in a specific account, such as Non-Deductible Lobbying Expenses.

Important Considerations When Classifying Lobbying Expenses

The IRS defines lobbying broadly, and it's essential to understand what activities fall under this non-deductible umbrella.

What Constitutes Lobbying?

According to Publication 535, non-deductible lobbying expenses include amounts paid for:

• Influencing legislation at the federal, state, or local level.
• Participating or intervening in any political campaign for or against a candidate for public office.
• Attempting to influence the general public regarding elections, legislative matters, or referendums.
• Communicating directly with covered executive branch officials in an attempt to influence their official actions or positions.

The costs associated with researching, planning, or coordinating any of these activities are also considered non-deductible lobbying expenses.

Dues Paid to Organizations that Lobby

One of the most common ways businesses incur lobbying costs is through dues paid to trade associations, chambers of commerce, or similar business leagues. If a portion of your dues is used by the organization for lobbying activities, that portion is not deductible. 

Tax-exempt organizations are required to provide you with a notice stating what percentage of your dues is allocable to non-deductible lobbying and political expenses.

Distinction from Political Contributions

Lobbying expenses are separate from direct political contributions. As stated in Publication 535, contributions or gifts paid to political parties or candidates are also not deductible.

Tax Implications and Reporting

The primary tax implication of lobbying expenses is that they are non-deductible from taxable income.

How to Report Lobbying Expenses

You do not report lobbying expenses as a deduction on your business tax return (e.g., Schedule C, Form 1120, etc.). These costs must be excluded from your deductible business expenses. Failure to do so can result in adjustments and penalties during an IRS examination.

The In-House Expense Exception

Publication 535 notes a very narrow exception. A business can deduct up to $2,000 of its in-house expenses for influencing legislation or communicating with certain executive branch officials. This exception does not include payments made to professional lobbyists or dues paid to lobbying organizations.

What Records to Keep

It is critical to maintain clear records that distinguish lobbying activities from other business functions. You should keep:

• Invoices and contracts from professional lobbyists or public affairs firms.
• The notices from trade associations that break down the non-deductible portion of your dues.
• Documentation that separates the costs of lobbying from other deductible activities, such as general legal counsel or advertising.

How Fyle Can Help Track and Segregate Lobbying Expenses

Fyle helps you identify and isolate non-deductible lobbying costs, ensuring they are not accidentally claimed on your tax return.

• Isolate Non-Deductible Costs: Create a specific, non-reimbursable expense category in Fyle for Lobbying Expenses to flag these costs for proper accounting treatment.
• Track Association Dues: When an invoice for trade association dues is submitted, attach the notice detailing the non-deductible lobbying portion.
• Centralize All Documents: Keep contracts with lobbying firms and all related invoices in one place for a clear and complete audit trail.
• Automate Your Accounting: Fyle’s integration with QuickBooks, Xero, NetSuite, and Sage Intacct allows you to map these costs to a specific Non-Deductible Expense account in your general ledger, preventing them from being mixed with deductible expenses.