Calculating "in-house" lobbying expenses under IRS safe harbors.

• Author: Repass, Mike

The provision of the Revenue Reconciliation Act of 1993 disallowing deductions for lobbying expenses under Sec. 162(e) does not provide clear rules on how taxpayers are to calculate total nondeductible expenditures. While computation of lobbying expenses paid to professional lobbyists and other "third parties" should be relatively straightforward, it is unclear how expenses attributable to lobbying performed "in-house" should be calculated. For example, Sec. 162(e) does not specify what portion of an office's overhead or travel and entertainment expenses might be nondeductible as a result of lobbying activities. Similarly, often it will not be clear whether an activity is sufficiently related to lobbying to be subject to the disallowance provisions.

The IRS has attempted to help. Proposed regulations issued late last year would allow business and tax-exempt organizations to avoid having to track these "inhouse" expenses. instead, the optional safe harbors rules generally would require only that taxpayers capture the total hours that employees spent lobbying.

Under the "ratio" method safe harbor, in-house lobbying expenses generally would be the total cost of operations multiplied by a fraction, the numerator of which is total lobbying labor hours and the denominator of which is total taxpayer labor hours. Hours spent by secretarial, maintenance and similar personnel could be excluded from both the numerator and the denominator.

Under a second proposed safe harbor (the "gross-up" method), a taxpayer first would determine, for each employee, hours spent lobbying divided by total hours worked for the year. This fraction would be multiplied by wages or salary, excluding pension or other qualified benefit costs. This amount would then be multiplied by 175%, which would produce total in-house lobbying expenses.

Not all of an employee's time spent lobbying would have to be taken into account under these safe harbors. Taxpayers could disregard lobbying by employees who spend less than 5% of their time lobbying. This de minimis rule, however, would not apply to "direct contact" lobbying, defined as meetings, telephone conversations, letters, or other similar communications with legislators and certain high-ranking Federal officials - but not their staffs. All employee time spent on direct contact lobbying would have to be counted as time spent lobbying.

To take advantage of either safe harbor, a taxpayer must establish some type of recordkeeping...