What Is a 501(c)(7) Tax-Exempt Social Club?

Young woman playing tennis.
•••

 Caiaimage/Chris Ryan/Getty Images

There are many so-called nonprofit organizations. The most familiar is the charitable organization, designated as 501(c)(3). Typical charities that we donate to and volunteer for fit this category.

However, there are many more nonprofit types according to the IRS. One of those is the social club, designated as a 501(c)(7).

Social clubs are exempt from federal income tax if they are “organized for pleasure, recreation, and other nonprofitable purposes.” The key here is “nonprofitable.” These clubs are run for the benefit of their members and do not pursue a profit. That is what makes them nonprofit rather than commercial.

Tax-exempt social clubs serve their members through access to social and recreational facilities, like clubhouses, golf courses, swimming pools, and tennis courts. The dues members of these clubs pay support all the activities and facilities. This arrangement allows individuals to band together for recreational and social opportunities without tax consequences.

All of this only works if the club’s income comes exclusively from members. However, as social clubs grew and facilities needed to be subsidized more, the tax code extended the “unrelated business income tax” (UBIT) to social clubs. 

The UBIT initially applied to charitable organizations when they engaged in businesses that were not related to their primary charitable purpose. In the case of a charitable organization, that income is only taxed when it goes beyond a certain percentage of support. However, in the case of the social club, all passive income such as dividends, rents, and investments can be taxed. So, proceeds from memberships are not taxed; income from unrelated business activities are taxed.

The other primary difference between a charitable organization and a tax-exempt social club is that “donations” are not tax-deductible to the donor. Typically, social clubs have membership dues rather than donations. Those dues are not tax deductible.

What Are Some Examples of Tax-Exempt Social Clubs?

These clubs, to qualify, must have a limited and defined membership such as those 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, swimming, etc
  • Yacht clubs
  • Hobby clubs such as model railroaders and gardening

Such organizations are member based and do not have to provide a public service or community benefit beyond serving their members. They are tax-exempt because members band together for mutual enjoyment. The reasoning? Had they paid money to have fun individually, they wouldn’t be liable for income tax, so the social club is not taxed on the dues paid by members.

To qualify for tax-exemption, a social club must meet these requirements:

  • Limited membership
  • Organized for pleasure, recreation, and other non-profitable purposes
  • Almost all activities must further those purposes
  • Provides the opportunity for members to engage in personal contact ("commingle")
  • Supported by membership fees, dues, and assessments
  • One of the primary tenets of nonprofit organizations is that the organization’s net earnings may not inure (i.e., benefit) any person who has a personal and private interest in its activities. Transgressions of this rule could endanger the organizations exempt status.
  • Must not claim to provide goods and services to the general public
  • Cannot offer pleasure or recreation on a commercial basis

Incorporation and Income from Non-Member Dues

Today, most nonprofit social clubs incorporate within their states. As corporations, they own land, buildings, stock, bank accounts and other assets. Club income from these assets can be taxed.

To remain a 501(c)(7) organization, a social club must direct most of its income to the club’s exempt purposes. That generally means that no more than 35 percent of the club’s gross receipts should come from non-member sources. Furthermore, within that 35 percent, no more than 15 percent should come from the use of the club’s facilities or services by the general public.

Social clubs must be careful about establishing business operations that have nothing to do with their exempt purpose. For instance, a dining room to serve members might be okay but running a liquor store probably not.

Benefits to Setting Up a Tax-Exempt Social Club and Disadvantages

There are several benefits to setting up a nonprofit social club. For instance, a for-profit club has to pay taxes when they raise the membership dues, or when they assess members extra to make building repairs. The nonprofit social club can usually avoid these taxes.

On the other hand, nonprofit social clubs have to forego some of the advantages of charitable organizations such as providing a tax deduction to donors or receiving funding from foundations. They also have the onerous task of keeping scrupulous records to maintain their nonprofit status and monitor their non-membership income to make sure they don’t go over the allowed amount.

Nonprofit social clubs must make sure that all net profit goes to exempt purposes and none goes to benefit any individual. They must be wary of conflicts of interest by paid staff and unpaid board members.

Although tax-exempt social clubs may limit their services to paying members, they cannot exclude individuals of a particular race or color. However, they may limit membership to people of a specific religion to further the teachings or principles of that religion.

Although exempt from income taxation, social clubs are usually required to file annual returns of their income and expenses with the Internal Revenue Service. A Form 990, 990-EZ or 990-N must be filed with the IRS by the 15th day of the fifth month after the close of the organization’s fiscal year. To apply for 501(c)(7) status, organizers must use IRS form 1024. Social clubs may need to file other returns and pay employment taxes. Should a club have unrelated business income, it must file an unrelated business income tax return.

Resources:

Social Clubs, Langley and Rosenberg

This article is just for informational purposes. It is not intended to be legal advice. Check other sources, such as the IRS, and consult with legal counsel or an accountant.