Social clubs may be exempt from federal income taxation if they meet the requirements of section 501(c)(7) of the Internal Revenue Code. Although they are generally exempt from tax, social clubs are subject to tax on their unrelated business income (see below), which includes income from nonmembers . In addition to being taxed on unrelated income, a social club may lose its exempt status if it receives too much unrelated income. See “Effect of Nonmember Income” below.
- The club must be organized for exempt purposes.
- The club must provide an opportunity for personal contact among members and membership must be limited.
- The club must be supported by membership fees, dues, and assessments.
- The organization’s net earnings may not inure to the benefit of any person having a personal and private interest in its activities.
- If the club exceeds safe harbor guidelines for nonmember and investment income, the facts and circumstances must show that it is organized substantially for exempt purposes. See “Effect of Nonmember Income on Exempt Status" below for more information.
- The club may receive de minimis income from nontraditional sources.
- The club's governing instrument may not contain a provision that provides for discrimination against any person on the basis of race, color, or religion.
Effect of Nonmember Income on Exempt Status
A social club may receive up to 35 percent of its gross receipts from nonmember sources , including investment income. Within the 35 percent amount, no more than 15 percent of gross receipts may be derived from nonmember use of club facilities and services. Where the permitted levels of nonmember income are exceeded, all facts and circumstances will be considered in determining whether the club continues to qualify for exemption.
Unrelated Business Taxable Income
The Internal Revenue Code provides special rules for calculating the unrelated business taxable income of social clubs that are tax-exempt under section 501(c)(7). Under these rules, clubs are generally taxed on income from non-members who are not bona fide guests of members. The fact that income derived from non-members is used by an exempt organization in furthering its exempt purpose (such as expanding the club's facilities) does not change the fact that the income is from an unrelated activity. Clubs are also generally taxed on income from investments.
An exempt organization that has $1,000 or more gross income from an unrelated business must file Form 990-T, Exempt Organization Business Income Tax Return. This is in addition to the requirement to file an annual exempt organization return. See “Required Filings” below.
Revenue Procedure 71-17 details the recordkeeping requirements for social clubs that conduct activities with nonmembers. The records must distinguish one type of income from another (gambling income vs. food sales income) and one type of expense from another. The records should be retained for at least three years from the due date of the organization’s annual return.
Clubs that allow nonmembers to use their facilities must collect and maintain certain information. The information collected for an event should include:
- Total number in the party
- Number of nonmembers in the party
- Total charges
- Charges attributable to nonmembers
- Charges paid by nonmembers
- Where a member pays all or part of the charges attributable to nonmembers, a statement signed by the member indicating whether he or she has been or will be reimbursed for such nonmember use and, if so, the amount of the reimbursement.
Failure to keep records that distinguish the types and sources of income and expenses will result in a presumption that all income is unrelated to your exempt purpose and therefore subject to unrelated business income tax.
Although they are exempt from income taxation, social clubs are generally required to file annual returns of their income and expenses with the Internal Revenue Service. In addition to filing an annual exempt organization return, social clubs may be required to file other returns and pay employment taxes. Some clubs may be required to file certain returns electronically.