501c7 Social Club: Requirements for Tax-Exempt Status

A 501(c)(7) social club is an organization granted tax-exempt status under the Internal Revenue Code. These clubs, which can include fraternities, country clubs, and sports clubs, are organized for pleasure, recreation, and other similar nonprofitable purposes for their members. The primary benefit of this designation is an exemption from federal income tax on the income generated from its members, allowing the organization to use more of its funds for social and recreational activities.

Organizational and Operational Requirements

To qualify for tax-exempt status, a club must be organized and operated for pleasure, recreation, and other nonprofitable purposes. The club’s formation documents, such as its constitution or articles of incorporation, must clearly state these purposes. The organization must operate in a way that reflects this mission, focusing on activities that serve the social and recreational interests of its members.

A central requirement is that the club must foster personal contact and fellowship among its members. This necessitates that the organization have a limited and defined membership, often with a formal application and approval process. The structure is intended to create a commingling of members for social or recreational purposes, distinguishing it from a business that serves the general public. The club cannot hold itself out as providing goods and services to the public on a commercial basis.

Furthermore, a 501(c)(7) organization is prohibited from allowing its net earnings to inure to the benefit of any private shareholder or individual. This means that the club’s income and assets cannot be distributed to members or other private individuals. Any profits must be reinvested back into the club to support its exempt activities. The club’s governing documents also may not contain provisions that discriminate based on race, color, or religion.

Understanding Income Sources and Taxation

The financial structure of a 501(c)(7) club is built on a distinction between two types of income: exempt function income and non-exempt function income. Exempt function income is derived from members and includes dues, fees, and charges for the use of club facilities and services that directly support its social mission. This type of income is not subject to federal income tax.

Conversely, non-exempt function income comes from sources outside the membership. This includes revenue generated from non-members using club facilities, as well as income from investments. This category of income is subject to the Unrelated Business Income Tax (UBIT). The logic behind taxing this income is that it is generated from activities not directly related to the club’s exempt purpose.

To maintain its tax-exempt status, a social club must adhere to limits on non-exempt income, governed by the 35/15 Gross Receipts Test. Under this test, a club’s income from non-member sources, including investment income, cannot exceed 35% of its total gross receipts. For example, if a club has total gross receipts of $200,000, no more than $70,000 can come from these sources.

Within this 35% limit, there is a more restrictive sub-limit. No more than 15% of the club’s total gross receipts can be derived from the use of its facilities or services by the general public. Using the same $200,000 gross receipts example, a maximum of $30,000 can come from non-members using the club. If a club exceeds these thresholds, it risks losing its tax-exempt status. Investment income is part of the 35% calculation and is taxed as unrelated business income.

Applying for IRS Recognition of Exemption

While a social club can operate as a 501(c)(7) without official recognition, it is advisable to file for a formal determination letter from the IRS. This letter serves as official proof of tax-exempt status. To apply, an organization files Form 1024, Application for Recognition of Exemption.

Before filing, a club must gather its organizational documents, such as its articles of incorporation, constitution, or bylaws. These must clearly state that the club is formed for pleasure, recreation, and other nonprofitable purposes and must not permit the inurement of net earnings to private individuals.

In addition to governing documents, the applicant must prepare detailed financial data. For an existing organization, this involves providing financial statements for the current year and the three preceding years. For a newly formed club, the requirement is a projection of likely income and expenses. A description of the club’s past, present, and planned activities is also required.

The Application Filing Process

The IRS requires that Form 1024 be filed electronically through the Pay.gov portal. This online system is the exclusive method for submitting the application and all required attachments, such as bylaws and financial statements.

At the time of electronic submission, the applicant must also pay a user fee. This fee is required for the IRS to process the application. The specific amount can be confirmed on the IRS website or within the Pay.gov portal.

After the application is successfully submitted and the fee is paid, the organization will receive an electronic acknowledgment from the IRS. The application then enters a processing queue, which can take several months. Upon completion of the review, the IRS will issue a determination letter granting or denying tax-exempt status.

Maintaining Tax-Exempt Status

To maintain its tax-exempt status, a social club must fulfill ongoing responsibilities. A primary obligation is the annual filing of an information return with the IRS, regardless of whether the club has received a formal determination letter. Most clubs will file a form from the Form 990 series, with the specific form depending on the organization’s financial activity. Clubs with gross receipts of at least $200,000 or total assets of $500,000 or more must file the full Form 990.

Organizations with lower financial figures may be eligible to file a simpler version. A club with gross receipts under $200,000 and total assets under $500,000 can file Form 990-EZ. For very small clubs with gross receipts of $50,000 or less, the filing requirement is met by submitting Form 990-N, an electronic postcard. These returns must be filed by the 15th day of the fifth month after the end of the club’s accounting period.

Beyond the annual information return, a club must file Form 990-T, Exempt Organization Business Income Tax Return, if it has $1,000 or more in gross income from an unrelated trade or business during the year. This includes income from non-member sources and most investment income. The club must diligently track all sources of revenue to ensure it continuously meets the 35/15 Gross Receipts Test and preserves its tax-exempt status.