A social club can owe tax on money that does not come from its members

Exemption for a social club was built around member money, and income from anywhere else follows different rules.

Most volunteer treasurers hear that their club is tax-exempt and take it to cover everything the club earns. For a club organized under section 501(c)(7), the exemption is tied closely to dues, fees, and the things members pay for each other. Money that comes from outside the membership gets treated differently.

The IRS says a social club is generally taxed on income from nonmembers who aren’t bona fide guests of members, and generally taxed on its investment income. The Form 990-T instructions describe it the same way. Unrelated trade or business income for a social club includes all gross income from nonmembers, with certain modifications, and the instructions have a separate part just for the investment income of these clubs. Their own example is a club’s restaurant and bar receipts from nonmembers.

Here’s how that can look in practice. A flying club charges nonmembers a fee to come to its fly-in breakfast. A yacht club hosts a wedding for someone with no connection to the club and charges for the room. A ski club lets a corporate group use the lodge for a weekend. Each of those is outside money. Separate from all of them, the interest and dividends on the reserve account are investment income, which the IRS also says is generally taxed for a social club.

Whether a particular dollar counts, and how much of it, depends on the facts. Who was a bona fide guest of a member, who paid, what the money was for. Those details matter, and they’re the reason a treasurer should not guess.

There’s a second concern beyond the tax. The IRS says a section 501(c)(7) club may receive up to thirty-five percent of its gross receipts, including investment income, from sources outside its membership without losing exemption. It adds that within that thirty-five percent, no more than fifteen percent of gross receipts may come from use of the club’s facilities or services by the general public or from activities that don’t further the members’ social or recreational purposes. When the permitted levels are exceeded, the IRS says all the facts and circumstances are considered in deciding whether the club continues to qualify. That’s a judgment call with the club’s own records at the center of it, and it leaves a club no reason to stop watching the numbers.

The return that reports this income is the Form 990-T. An exempt organization with a thousand dollars or more of gross income from an unrelated business must file it. For a social club, that’s worth keeping an eye on, because investment income and the occasional nonmember event can add up without anyone tracking them.

The habit that helps most is simple. Keep member income and nonmember income on separate lines in the books, and keep a note of who each event was for. A treasurer who inherits a mixed pile of deposits has no way to sort them out afterward.

How this plays out for your club depends on its own income and records. If nobody has ever separated member money from everything else, that’s where to start.

Does your club take in money from nonmembers or earn interest on reserves? Let’s talk through how it should be reported.

Everything here is general information, not tax or legal advice. Reading it doesn’t make you a client, and your facts will change the answer.