Proxy Tax

What Is Proxy Tax?

A proxy tax is a tax penalty assessed against organizations that are for the most part tax-exempt yet may need to pay taxes on funds used to pay for campaigning activities. Organizations possibly subject to a proxy tax incorporate those organized under 501(c)(4), 501(c)(5), and 501(c)(6) of the tax code.

A proxy tax will be exacted against a tax-exempt organization assuming that that organization neglects to accurately estimate the amount of money it will spend on campaigning activities in a given year. In such a case, the proxy tax rate demanded would be the highest marginal corporate tax rate for that tax year.

How Proxy Tax Works

Proxy tax is a concern for organizations that are both tax-exempt yet additionally participate in campaigning, similar to professional organizations, business leagues, or offices of commerce. Enrollment fees for these organizations are to a great extent tax-deductible.

To accomplish tax-exempt status, such organizations must be "of people having some common business interest, the purpose of which is to advance such common interest and not to participate in a standard business of a sort customarily carried on revenue driven," as per Internal Revenue Service rules. Such organizations may not exist for the financial benefit of at least one of its shareholders, and the organization must principally exist to further develop business conditions generally.

Simultaneously, it is common for such business leagues to take part in campaigning activity, which is definitely not a tax-exempt purpose under the United States Internal Revenue Code. To keep a brilliant line between such campaigning activity and the other tax-exempt activities, the IRS requires business leagues to estimate which percentage of their funds will go to campaigning versus other, tax-exempt activities. These organizations must give notice to their duty paying individuals with regards to which percentage of their levy will be tax-deductible.

Assume incidentally, genuine campaigning activities surpass the amount estimated. In that case, the tax-exempt organization will be required to make up the tax revenue renounced in light of the fact that contribution paying individuals overestimated the share of their tax-deductible duty. This compensatory tax is called a proxy tax.

Organizations must tell their levy paying individuals which percentage of their contribution are tax-deductible.

Illustration of Proxy Tax

Suppose that you pay $1,000 in annual levy to your neighborhood business league, under the assumption that just half of that money will go toward campaigning activity. On the off chance that it would seem 75% of your levy went to campaigning activity, then the business league will be responsible for paying a proxy tax on the difference.

Features

• Organizations took part in campaigning are much of the time concerned about proxy tax.
• Organizations that inaccurately estimate the amount of money they spend on campaigning activities must pay the highest marginal corporate tax rate as the proxy tax.
• Compensatory tax is called a proxy tax.
• Organizations under 501(c)(4), 501(c)(5), and 501(c)(6) of the U.S. tax code might be subject to a proxy tax.
• A proxy tax is a penalty paid by generally tax-exempt organizations.