Some organizations that serve their members through access to social and recreational facilities, such as clubhouses, golf courses, swimming pools, and tennis courts, are 501(c)(7) social clubs. Members of these clubs pay dues to support the activities and the facilities, and the clubs might also charge additional usage fees and provide food services.
These social clubs are exempt from federal income tax if they're organized solely for recreation and other nonprofit purposes. They operate for the benefit of their members, not to realize a profit.
What Is a 501(c)(7) Social Club?
A social club must meet several requirements to qualify for tax-exempt status as a 501(c)(7) organization:
- It must have limited membership.
- It must be organized for pleasure, recreation, and other non-profitable purposes.
- Almost all activities must further these purposes.
- It must provide the opportunity for members to commingle and engage in personal contact.
- It must be supported by membership fees, dues, and assessments.
- The organization’s net earnings can't benefit any individual who has a personal and private interest in its activities.
- It must not claim to provide goods and services to the general public.
- It can't offer pleasure or recreation on a commercial basis.
Benefiting any individual who has a personal or private interest in the club can endanger the organization's exempt status.
How Do 501(c)(7) Social Clubs Work?
Nonprofit social clubs must make sure that all net profit goes to exempt purposes. None can benefit any single individual.
Although tax-exempt social clubs can limit their services to dues-paying members, they can't exclude individuals of a particular race or color. They can limit membership to people of a specific religion, however, if the action is taken in an effort to further the teachings or principles of that religion.
Types of 501(c)(7) Social Clubs
These clubs must have a limited and defined membership. Members might be associated with:
- College social/academic fraternities and sororities
- Dinner clubs providing a meeting place, library, and dining room for members
- Variety clubs
- Homeowners or community associations that own and maintain recreational areas and facilities
- Alumni clubs
- Country clubs
- Dinner clubs
- Amateur sports clubs, such as hunting, fishing, tennis, and swimming
- Yacht clubs
- Hobby clubs such as model railroaders or gardening
All these types of clubs must be member-based. They can't provide a public service or community benefit beyond serving their members. Organizations must submit proof that they serve a limited membership in order to qualify for tax-exempt status.
Pros and Cons of 501(c)(7) Social Clubs
There are several benefits to setting up a nonprofit social club. A for-profit club has to pay taxes when it raises membership dues, or when it assesses members extra fees to make building repairs, but a nonprofit social club can usually avoid these taxes.
Social clubs aren't "charitable organizations" like 501(c)(3) nonprofits, however, so they generally can't provide a tax deduction to donors or receive funding from foundations.
A primary difference between a charitable organization and a tax-exempt social club is that donations aren't tax-deductible to the social clubs' donors. Social clubs typically have membership dues rather than accept donations. Dues generally aren't tax-deductible to the member.
Social clubs also have the task of keeping scrupulous records to maintain their nonprofit status.
Requirements for 501(c)(7) Social Clubs
A 501(c)(7) social club must direct most of its income to the club’s exempt purposes in order to remain tax-exempt. This generally means that no more than 35% of the club’s gross receipts should come from non-member sources. No more than 15% of that 35% should come from the use of the club’s facilities or services by the general public.
These social clubs must monitor their non-membership income closely to make sure they don’t go over the allowed percentages.
Unrelated income from activities not related to the organization's primary purpose is only taxable to a charitable organization when it goes beyond a certain percentage of support, but all passive income can be taxable to a social club. This can include income generated by dividends, rents, and investments. Proceeds from memberships aren't taxed, but income from unrelated business activities are.
Social clubs must be careful about establishing business operations that have nothing to do with their exempt purpose. A dining room to serve members might be okay, but running a liquor store probably would not.
Social clubs are required to file annual returns of their income and expenses with the IRS even though they're exempt from income taxation for the most part. Form 990, 990-EZ, or 990-N must be filed by the 15th day of the fifth month after the close of the organization’s fiscal year.
Organizers must use IRS Form 1024 to apply for 501(c)(7) status. Social clubs may also be required to file other returns and pay employment taxes. A club must file an unrelated business income tax return if it has any unrelated business income.
- 501(c)(7) social clubs provide dues-paying members access to social and recreational activities.
- The club’s net earnings can't benefit anyone who has a private interest in its activities.
- This type of social club does not have to pay taxes on funds received as dues, but passive income such as dividends or rents can be taxable.
- Income raised from unrelated business activities is also typically taxable.
This article is provided for informational purposes only. It is not intended to be legal advice. Check other sources, such as the IRS, and consult with legal counsel or an accountant if you're considering forming such a club.