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Traditional and Nontraditional Business Activities of Tax-Exempt Social Clubs

An exempt club may receive nonmember income, consistent with exempt status, subject to limits on the amount of permitted unrelated business income. Permitted amounts must be received from activities that, if conducted with members, would further the club’s tax-exempt purposes. Income from investments is also from a permitted traditional activity.

Example 1: A social club owns a building in an urban area in which it provides athletic facilities, dining rooms, meeting rooms, and libraries for its members and their guests. The room also contains a number of hotel style rooms that are rented to members who stay in town after an evening attending club functions.  At least 10 percent of the rooms are rented to members for use as their principal residence, however.

Renting rooms to members for occasional use when club activities are late in the evening furthers section 501(c)(7) exempt purposes by allowing members to participate fully in club events.  But long-term rental of rooms to members primarily serves to provide housing and does not further recreational purposes.  Whether the club qualifies for exemption depends on whether it exceeds limits on nonmember income.

Example 2: A social club provides athletic facilities, dining rooms, meeting rooms, and libraries for members and their guests.  The lobby of the club has a number of stores including a barber shop, flower shop, and liquor store.  Store income received from nonmembers is subject to unrelated business income tax.  The club will retain its exempt status as long as the income does not exceed established limits.  The club does not qualify for exempt status if any income from these stores is derived from dealing with the general public, however.

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Page Last Reviewed or Updated: 06-Mar-2014