Get tax relief like a billionaire on your political donations

On Sept. 15, left-leaning Patagonia founder Yvon Chouinard announced he was donating 98% of the company, a multi-billion dollar outdoor apparel company, to a nonprofit group for combat climate change. In August, it was revealed that in 2020, Chicago billionaire Barre Seid had donated 100% of the shares of his electrical appliance maker Tripp Lite to another nonprofit group to “maintain and expand human freedom”.

By making these political donations to nonprofit advocacy groups, these very different business owners are achieving similar results: Both have avoided several hundred million dollars in taxes on business sales, and the money not paid in taxes will instead go to their favorite causes, according to independent tax analyst Robert Willens.

The transactions shine a light on tax breaks for political donations just as Americans head into high-stakes congressional midterm elections. Although direct contributions to candidates, parties and political action committees do not qualify for tax deductions, there are other ways to obtain tax relief for donations. Both small and large donors can use them.

“Nonprofit groups from all political persuasions are using creative yet legal tax maneuvers to maximize the dollars available for their work,” says Paul S. Ryan, campaign finance specialist currently on the Funders Committee for civic participation.

Details of Mr. Chouinard’s donation are not yet available, but Mr. Willens estimates the transfer could save more than $700 million in tax on the sale of the business. Patagonia had annual revenue of $1 billion from 2017 to 2020.

Mr. Seid’s gift illustrates how tax strategies work. In 2020, the billionaire donated his Tripp Lite property to Marble Freedom Trust. Marble is a 501(c)(4) nonprofit entity established in 2020. This category of nonprofit organizations, which includes social groups like Rotary clubs but also many nonprofit political organizations, is authorized to do far more political advocacy than 501(c)(3) charities such as Girl Scouts, universities, and churches.

Unlike a donation to a charity, Mr. Seid’s donation was not eligible for a tax deduction, but he also did not owe capital gains or gift tax.

Because it is a non-profit organization, Marble was able to sell Tripp Lite to Eaton Corp.

tax-exempt a few months later, and he received $1.6 billion. If Mr. Seid had sold his stake directly to Eaton, he would have owed up to $450 million in federal and state taxes on the sale, leaving Marble about $1.2 billion, according to independent tax expert Robert, a said Mr. Willens.

“As far as we know, this transaction is fully within the law, but whether these rules are desirable is another story,” says Ellen Aprill, nonprofit scholar and professor emeritus at Loyola Law School. from Los Angeles.

Control of Congress is up for grabs and the candidates are eager to sway voters in November. The WSJ’s Joshua Jamerson explains how Republicans and Democrats are framing the debate around key issues such as the economy, abortion, gun violence, immigration and student loan forgiveness. Photo illustration: Laura Kammermann

There are other ways to turn non-deductible political donations into donations that are.

The first is that many advocacy groups, such as the National Rifle Association and the American Civil Liberties Union, are organized as 501(c)(4) nonprofit organizations like those of Mr. Seid and Mr. Chouinard, so that donations made to them are not tax deductible. .

However, many nonprofit advocacy organizations have affiliated groups organized as 501(c)(3) charities. These often have a similar name, such as the NRA Foundation or the ACLU Foundation. Because these charities are expected to do less advocacy and more education, donations to them are tax deductible.

The lines between allied groups can be porous, and some charities transfer funds to their related advocacy groups, according to Sheila Krumholz, executive director of Open Secrets, a nonpartisan group that tracks political spending. “It’s not an uncommon tactic,” she said.

For donors, the federal contribution rules are confusing, as some are administered by the Federal Election Commission and others by the Internal Revenue Service. Here are the relevant rules, donation limits and disclosure requirements.

Direct donations to candidates, parties and certain political action committees. Individual donations totaling more than $200 per year must be disclosed to the Federal Election Commission, which posts the donor’s name, address and amount on its website.

Overall, individuals can donate up to $2,900 per election to a candidate, $5,000 to a traditional PAC, $10,000 per year to state party committees, and several hundred thousand dollars per year. national party committees. These donations are not tax deductible and the recipients can use them for various purposes.

Candidates, parties, and PACs in this category generally cannot receive donations from nonprofits, businesses, or unions, only from individuals and other PACs.

Donations to super PACs. These groups came into existence in 2010 after key court decisions authorized them. They cannot coordinate with campaigns or contribute directly to candidates and parties, but they can spend to support them, for example by running advertisements.

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Super PACs can accept unlimited donations from individuals, unions, nonprofits, and businesses, and their expenses are also unlimited. Donors who give more than $200 to super PACs are public, but can often conceal their identity by channeling contributions through a limited liability company or 501(c)( 4), says Ryan.

Donations to 501(c)(4) nonprofit organizations. These are the most controversial vehicles for political spending, as they often contain “dark money” from unknown donors. In the 2020 election cycle, political spending by these nonprofits exceeded $800 million, more than triple the total for the 2016 cycle.

Although these nonprofits are meant to improve public life, they are not charities and the category includes many policy-oriented nonprofits, such as One Nation (conservative) and Majority Forward (liberal). ).

Entities organized as 501(c)(4) nonprofit organizations cannot contribute to federal election candidates, but they can participate in campaigns and elections to a certain extent. Critics say this point has not been clearly defined or enforced by the IRS. Groups can also contribute to super PACs.

Individuals, businesses and unions can make unlimited donations to these groups. Donor names are not public, but contribution amounts must be disclosed to the IRS if the donation is $5,000 or more. Contributions to 501(c)(4) groups are not tax deductible, but under current law are not subject to gift tax or capital gains tax, as shown by the gifts of Mr. Seid and Mr. Chouinard.

Donations to a 501(c)(3) charity. As stated earlier, many well-known advocacy organizations have affiliated charities.

These charities cannot directly support or oppose candidates, but they can fund political discussions, ballot initiatives and lobbying. They can also transfer funds to their related advocacy groups for various purposes.

Donations to charities are generally tax deductible if the group sends proper notice to the donor. Groups do not have to disclose donors to the public, but in some cases they must disclose them to the IRS.

Write to Laura Saunders at laura.saunders@wsj.com

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