Among the IRS’s compliance strategies for FY 2019 is a focus on tax-exempt clubs and their investment income, nonmember income and non-filing of Form 990-T, Exempt Organizations Business Tax Return. To this end, and in furtherance of the IRS’s educational initiatives, some clubs have received letters from the IRS encouraging them to monitor their gross receipts from nonmember sources and to maintain books and records demonstrating continued qualifications for exemption.
Section 501(c)(7) says private clubs generally are exempt from federal income tax except to the extent that they have unrelated business taxable income (UBTI)—e.g., investment income and use of the club by nonmembers. Therefore, it is necessary for private clubs to track and report their nonmember income.
Private clubs must also be cautious of a limitation imposed on their ability to receive income from other than their members. Specifically, a private club may receive up to 35 percent of its gross receipts from nonmember sources without jeopardizing its exempt status. Within this limitation, no more than 15 percent of the club’s gross receipts may be derived from the use of the club’s facilities or services by the general public (the “15/35 percent limitations”).
What does this mean for private clubs?
A tax-exempt social club’s Form 990 clearly and succinctly shows the type and amount of income a social club earns during the year, making the club’s compliance with the 15/35 percent limitations transparent and easy to calculate. All clubs should regularly review their recordkeeping practices to ensure that they are adequately tracking nonmember use of facilities and services (e.g., are members completing Party of Eight forms?). In addition, clubs should periodically monitor their compliance with the 15/35 percent limitations so that adjustments can be made in operations and investments if necessary.
How can RSM help?
RSM’s private club tax professionals can assist clubs in reviewing their recordkeeping practices and evaluating their compliance with the 15/35 percent limitations. Our experience with the private club sector enables us to provide clubs with insights about how to structure operations, implement recordkeeping practices that comply with the tax law, and properly identify nonmember income, including distinguishing between bona fide guests and nonmembers.