Your Club as a Business - 501(c)(7) Incorporation
A section 501(c)(7) organization is permitted to receive up to 35% of its gross receipts, including investment income, from outside of its membership without losing its tax-exempt status.
The existence of private inurement can operate to deprive a social club of its exempt status. The general test is whether the club generates revenue from non-members, the use of which is rebounding to the personal advantage of the members (such as reduced dues, improved facilities, and the like). In other words, the organization is for the benefit of members, not single individual.
I. A "Social and Recreation Club."
A. "Social and recreation clubs" are organized for pleasure, recreation and other nonprofitable purposes, substantially all of the activities of which are for such purposes and no part of the net earnings of which inures to the benefit of any private shareholder.
1. To qualify as a tax exempt social club, an organization must not only be a nonprofit entity but must meet both an organizational and an operational test.
a. To satisfy the requirement of having a pleasure, recreation or other permissible purpose, a social club must have an established membership of individuals, personal contacts and fellowship.
b. A commingling of the members of the club must play a material part in the life of the organization.
2. Private Inurement. The existence of private inurement can operate to deprive a social club of its exempt status.
a. The general test is whether the club generates revenue from nonmembers, the use of which is redounding to the personal advantage of the members (such as in reduced dues, improved facilities, and the like).
B. Public Use of Club Facilities. Under tax regulations, a club which engages in the business of making its social and recreational facilities available to the general public is not organized and operated exclusively for pleasure, recreation and other nonprofit purposes and is not exempt under 501(c)(7).
1. Solicitation of the general public to utilize club facilities will disqualify the organization from exempt status.
C. Taxation of Social Clubs.
1. For most exempt organizations, contributions, passive income and related business income are all nontaxable.
2. For Social Clubs, the law isolates "exempt function income" and subjects the balance of revenue (including passive investment income) to taxation.
3. In contrast to 501(c)(3) organizations (charities), contributions to a 501(c)(7) social and recreation club are not deductible.
II. Governmental Activities.
A. Lobbying Activities.
1. A 501(c)(7) organization may devote a substantial part of its activities for lobbying purposes.
a. Lobbying means carrying on propaganda or otherwise attempting to influence legislation.
b. Lobbying also includes urging individuals to contact their legislators to propose, support, or oppose legislation.
2. In contrast, a 501(c)(3) organization cannot engage in substantial lobbying activities, or else it will forfeit its tax exempt status.
B. Political Campaigning Activities.
1. A 501(c)(7) organization may participate in lawful political campaign activities involving the nomination or election of public officials without adversely affecting its exempt status, provided such activities are insubstantial in relation to its overall activities.
a. Campaign activity includes participation or intervention in any political campaign on behalf of, or in opposition to, any candidate for public office. A candidate is any contestant for elective office.
b. Political campaign activities relate to individual candidates, whereas lobbying activities relate to social issues and laws.
c. Participation in a campaign includes publishing or distributing statements made either by a candidate or by someone else directed at a candidate.
2. However, the amounts expended for such activities may be treated as political organization taxable income under IRC 527(b).
3. In contrast, a 501(c)(3) organization is absolutely prohibited from engaging in any political campaigning activities whatsoever, or else it will forfeit its tax exempt status.
C. Deductibility of Membership Dues.
1. Any 501(c)(7) organization must, when membership dues are assessed or paid, notify members of the portion of dues allocable to lobbying and political campaign activities. This portion of membership dues is not deductible. See IRC 162(e) and 6033.
2. If a 501(c)(7) organization fails to give its members this notice, it will be taxed on the amount of dues allocable to lobbying and political campaign activities at the highest corporate tax rate.
3. These requirements do not apply in the case where membership dues are not otherwise deductible by members. Further, these requirements will not apply to a 501(c)(7) organization if either (1) the largest amount of annual dues paid by any member is $50 or less; or (2) greater than 90 percent of its members are tax exempt charities (501(c)(3) organizations).
4. The largest amount of annual membership dues will be treated as $50 or less if the amount of membership dues in excess of $50 is not more than 10 percent of the total amount of annual dues paid by all members.
- Your Club as a Business – a 7 Step Guide
- Your Club as a Business – Start with a Plan
- Your Club as a Business – Strategic Planning
- Your Club as a Business – Legal Status
- Your Club as a Business - Incorporation Comparision
- Your Club as a Business - 501(c)(3) Incorporation
- Your Club as a Business - Other Incorporation Options