The Internal Revenue Service (IRS) put the private club industry on notice this month when it delivered letters, unannounced, to 501(c)(7) private clubs encouraging them to monitor their gross receipts from nonmember sources and to notify them that the agency will increase its enforcement of nonmember revenue reporting.
This increased attention from the IRS serves as a critical reminder for clubs to comply with private and tax-exempt status rules. Otherwise, clubs may lose their tax-exempt and private statuses and be responsible for paying increased taxes and penalties and may have to fundamentally change how they operate.
Tax-Exempt and Private Status and the 15/35 Percent Test
To retain your tax-exempt and private statuses, your club may not receive investment and nonmember income exceeding 35% of its gross receipts and must also remain under the 15% limit of its gross receipts from the use of the club’s facilities or services by the public.
IRS Involvement and Record Keeping
Clubs operate unlike other tax-exempt organizations. For many tax-exempt entities, all income is good unless a specific code section states that it’s unrelated. For truly private clubs, all income is unrelated unless otherwise specified (e.g., the income is from members only with few exceptions). Therefore, if the IRS does inquire about your club’s revenue sources, it is critical to have kept proper records from the start. If a club cannot prove that the income is from members, the IRS may determine it can be taxed.
Per the letter, the IRS recommends clubs maintain records of nonmember activity including the:
- Date of the event
- Total number in the party
- Number of nonmembers in the party
- Total charges
- Charges attributable to nonmembers
- Charges paid by nonmembers
- Where a member pays all or part of the charges attributable to nonmembers, a statement signed by the member indicating whether he or she has been or will be reimbursed for the nonmember use and, if so, the amount of the reimbursement.
The IRS recommends these records be kept for at least three years from the due date or the date the return is filed, whichever is later.
Resources to Protect Your Club
NCA has compiled a list of resources to enhance your knowledge of and clarify tax-exempt and private status rules.
Safeguarding a Club’s Tax Exemption and Privacy
Privacy Checklist
Member Function Questionnaire (PBMares)
For additional information on private and tax-exempt status, please contact NCA Vice President of Government Relations Joe Trauger at [email protected] or 202-822-9822.