What Are the IRS 517 Rules for Social Clubs?

Social clubs can provide valuable recreational and social outlets, and many operate on a tax-exempt basis. This status is not automatic and requires adherence to specific Internal Revenue Service (IRS) rules. Understanding these regulations is necessary for a club to maintain its favorable tax treatment by correctly handling different sources of income and meeting reporting requirements.

Defining a Tax-Exempt Social Club

A social club may qualify for an exemption from federal income tax if it meets the requirements of Internal Revenue Code (IRC) Section 501(c)(7). The organization must be formed for “pleasure, recreation, and other nonprofitable purposes,” with its primary activities being social or recreational. Examples of such organizations include college fraternities, country clubs, and amateur sports clubs.

The club’s governing documents cannot contain any provision that discriminates against individuals based on race, color, or religion. The organization must also have a limited membership of individuals, reinforcing its private nature and focus on serving a specific group.

The club’s net earnings may not be distributed to benefit any private shareholder or individual. This means the club’s income and assets cannot be used to personally enrich its members or officers. The organization must be primarily supported by funds paid by its members, such as membership fees, dues, and assessments.

Sources of Club Income

A social club’s income is separated into two categories: exempt function income and non-exempt function income. Exempt function income is derived directly from members to fund the club’s activities. This includes revenue from membership dues, fees, assessments, charges for member use of facilities, and sales from amenities serving members.

Non-exempt function income comes from sources outside the club’s core membership activities, including all income derived from nonmembers. For instance, if a country club rents its ballroom to the public or hosts a corporate golf tournament, the revenue is non-exempt.

Investment income is also a source of non-exempt function income, including interest, dividends, and rent from leasing club property. This income, along with revenue from nonmember activities, is categorized as Unrelated Business Taxable Income (UBTI). UBTI is subject to federal income tax, and this taxable status is not changed even if the income is used to fund club operations.

The Nonmember Income Limitation Tests

To maintain tax-exempt status, a club must comply with IRS income limitations. The 35% test dictates that a club’s non-exempt function income cannot exceed 35% of its total gross receipts for the year. Gross receipts include total income from all normal activities, such as member dues and investment income, but exclude initiation fees and capital contributions.

Within this 35% limit is a 15% test, which specifies that no more than 15% of the club’s total gross receipts may come from nonmembers using its facilities or services. This portion of income is a component of the 35% total, not in addition to it. Investment income is part of the 35% calculation but does not count toward this 15% sub-test.

For example, a country club with total gross receipts of $500,000 cannot have its total non-exempt income exceed $175,000 (35%). To meet the 15% sub-test, income from nonmember use of its facilities cannot be more than $75,000 (15%). If the club earned $80,000 from nonmember events and $20,000 in investment income, its total non-exempt income of $100,000 is within the 35% limit, but it would fail the 15% test.

Tax Filing and Reporting Requirements

Most tax-exempt social clubs must file an annual information return with the IRS, and the specific form depends on the club’s financial activity. Organizations with gross receipts less than $50,000 may file Form 990-N. Clubs with gross receipts under $200,000 and total assets under $500,000 can file Form 990-EZ. Organizations exceeding these thresholds must file the more comprehensive Form 990.

These are informational returns and do not calculate a tax liability. The filing deadline is the 15th day of the 5th month after the end of the organization’s accounting period.

If a social club has $1,000 or more in gross income from non-exempt functions, it must also file Form 990-T, Exempt Organization Business Income Tax Return. This form reports and calculates the tax owed on its Unrelated Business Taxable Income (UBTI). The taxable income is the gross income from nonmember activities and investments, less any allowable deductions, and is taxed at corporate rates.