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There are many types of nonprofits, and the 501(c)(7) status is for social or recreational club organizations. Though net earnings do not serve a charitable purpose, they are exempt from paying federal income taxes under the Internal Revenue Service (IRS) Section 501(c)(7).
The status assists social clubs in staying financially secure so they can continue to provide recreational, pleasurable, and other nonprofitable activities.
If your club offers access to recreational facilities, such as golf courses, hobbies, clubhouses, and swimming pools, applying for a 501(c)(7) status is a good idea.
This article will explain the meaning of this tax exemption, its requirements, benefits, and steps for starting a nonprofit social club.
A 501(c)(7) organization is a social or recreational club that has tax exemption from federal income by the IRS if it is "organized for pleasure, recreation, and other nonprofitable purposes." This is different from many public charities or 501 (c) 3 organizations for tax-exempt purposes, where funds are paid primarily through donations.
501(c)(7) doesn’t rely on donations or fundraising to support its club. Like other tax exempt entities, a 501(c)(7) raises money primarily through membership dues and fees from club members. These organizations exist for private benefit.
Some organizations that can potentially qualify for 501(c)(7) status under the IRS include a club organized as:
College fraternities and sororities
Sports clubs
Country clubs
Dinner clubs
Hobby clubs
Homeowners associations
Other kinds of IRS tax-exempt status to be aware of in the event you fall into these categories are:
501c: A tax exempt status that enables nonprofit organizations to focus more resources on their charitable or social purposes by reducing their tax liability.
501c3: A tax exempt status for charitable organizations that receive donations and grants from the US federal government to cover operational costs.
501c6: A tax exempt status for charitable organizations created by individuals with common business interests rather than the public.
The IRS outlines several exemption requirements for 501 c7 social clubs to qualify and secure the status of a 501(c)(7) tax-exempt organization. It’s essential to ensure your group meets each of the requirements.
Purpose: Social clubs and their activities must exist for the pleasure and recreation of their members only, as you'd see with many hobby clubs. You must not claim to offer goods and services to the general public or collect gross income related to public benefit.
Personal contact: You must offer members the opportunity for face-to-face interactions, personal contact, and networking with each other. Think about the country and social clubs that often unite people for meetings and gatherings.
Limited membership: Social clubs must limit membership, offering their facilities and activities only to members and their guests, not the general public. This may be for social or recreational purposes such as:
Tennis club admission:
Community associations
Gatherings to practice a particular religion
Club functions for recreational purposes
Charitable organizations looking to raise money
Business leagues for sports or community-building
Events that serve members
A country club with membership requirements
Other sport clubs
Funding: Membership fees, dues, and assessments should support social clubs with net earnings to create an exemption from federal taxation. Up to 35% of your revenue can come from non-membership sources, including investment income. It's essential to collect gross receipts as a way to comply.
501c7 earnings: Your 501 c7 social club earnings from members should solely be used to enhance its activities and purpose. It should not be used for the private benefit of any club member.
Equality: You should not discriminate against any individual based on color, race, or religion. You can limit your membership to members of any faith only if the club’s purpose is to further the teaching of a particular religion.
Should You Start a 501(c)(7) Social Club?
Starting a social club is complex, but there are benefits and drawbacks. We’ll help you understand these below so you can make the most informed decision possible.
Benefits of Starting a 501(c)(7) Social Club
Under the IRS, forming a 501(c)(7) organization offers tax benefits, as these organizations are exempt from paying federal taxes. You can reinvest the revenue you’ve raised through club activities into the social club, improving your recreational purpose.
A 501(c)(7) status offers social clubs credibility and builds trust, which helps attract new members and partnership organizations.
When you start a club, you meet like-minded individuals who share your values, allowing you to create a more significant impact within your community.
Drawbacks of Starting a 501(c)(7) Social Club
Since 501(c)(7) is not a charitable organization, donors might not receive a tax deduction on donations or contributions. You may even have to pay taxes on funds raised by organizing 501 c7 fundraising events and activities for social clubs.
Tax-exempt social clubs must be very cautious about activities and programs. You must ensure you’re by the IRS's tax-exempt purpose. You can't rent out your club facilities for other events for social clubs.
You must file IRS Form 990 annually to ensure ongoing compliance for your 501(c)(7) social club. Although there are several types of Form 990, the kind you must file will depend on your organization's gross receipts.
Step 2: Select a Name for Your Nonprofit Social Club
Once you’ve decided, it's time to pick a unique and exciting name for your social club. Visit your state’s Secretary of State website to see if your selected name is available and register it as soon as possible. Check the domain name availability as well to create a website easily.
What you name your organization is critical to its success, as it will differentiate it from others. A great name will make you memorable while giving the world a sense of your mission. It will also encourage prospective supporters to learn more about your nonprofit. Take time to develop a name aligned with your club’s purpose.
Step 3: Create the Board of Your 501(c)(7) Organization
Every nonprofit organization should have a board, and the number of members will depend on state laws. Some states only require two members, but most require a minimum of three.
Your board should have a President, also known as Chair, Secretary, and Treasurer. You can also hire a Vice President or Co-Chair. Ensure your nonprofit board members have the skills, knowledge, and experience to serve your club’s purpose.
Step 4: Create Your Bylaws and Articles of Incorporation
Consider state- or city-specific requirements when drafting these documents for social clubs.
Getting help from a local attorney with experience in tax-exempt organizations will help ensure compliance with state and local laws.
According to the IRS rules, your nonprofit bylaws should be voted on and passed/accepted by the board of directors. These documents explain how your organization operates and guide your club internally. The IRS will review your bylaws to ensure your purpose and procedures comply with the 501(c)(7) requirements.
Your bylaws must be well-written, and everyone involved in your 501 c7 social club must have a copy.
Articles of Incorporation are needed for your organization to become a legal entity in the state where you’re operating. This document will comprise your club's name, registered address, name and address of board members, and purpose.
Note: Both these documents will be sent to the IRS for review.
Step 5: Get an Employer Identification Number
An Employee Identification Number (EIN) is essential for several reasons. This 9-digit ID lets you file for tax exemption with the IRS, create a bank account for your club, and make payroll if your club grows.
To apply for EIN status, you must fill out IRS Form SS-4 online and provide information, including the social security number of the organization's primary contact.
Step 6: Start a Nonprofit Bank Account
Once you've acquired the EIN, set up your nonprofit organization’s bank account. Find a bank that offers good perks for social and recreational clubs. Consider features like minimal fees, digital banking tools, high yield, and alignment with your values.
When opening your account, take the following documents with you:
Step 7: Apply for Federal Income Tax Exemption with the IRS
File for IRS Form 1024 to secure the tax-exemption status. You can fill it out online or download the application and fill in the details. Since the IRS form is lengthy and can be rejected for a minor error, hiring a legal expert to guide you through the paperwork is better.
Step 8: Find an Online Membership Management Software
Once you've completed the legal aspects of the 501(c)(7) organization, you can focus on its operational side.
You will require a solid solution to collect membership fees and organize your members' data—contact information, membership status, renewal dates, and engagement history.
Step 9: Identify Members and Start Promoting Your Club
Now that you're done setting up your 501(c)(7) organization, you must identify your ideal members. Depending on the type of 501 c7 social club you're operating, your members will comprise friends, classmates, community members, neighbors, colleagues, and online communities.
Create a list of potential members and promote your club to them via different communication channels. Use social media, direct mailing, emails, and word-of-mouth to grow visibility around your club. In promotions, highlight all social and recreational activities your club offers.
Delta Sigma Theta Sorority also used Zeffy's ticketing software for their Ugly Sweater Christmas Party event. Through online ticket sales, they raised over $51,000 and saved an additional $1,708 in fees.
By using the right tools, 501(c)(7) organizations like Delta Sigma Theta Sorority can successfully further their purpose of providing recreational and social activities for members.
Wrapping it Up on 501(c)(7) Social Clubs
While obtaining 501(c)(7) status requires dedication, time, and effort, it's a rewarding path to build a vibrant community around your shared interests and create a lasting impact.
As you establish your social club, invest in powerful yet user-friendly member management tools to streamline administrative tasks like tracking memberships, collecting membership fees, and coordinating activities.
FAQs on 501(c)(7) Status and Tax Exempt Organizations
While both 501 c 3 and 501 c7 social clubs are tax-exempt organizations, there are notable differences between the two. For starters, 501(c)(3) organizations
focus on charitable causes, whereas 501c7 nonprofits aim to offer social or recreational activities.
That means 501 c 3 tax-exempt entities can earn most of their revenue from public donations or government entities. 501 c 7 social clubs must be supported primarily by membership dues, fees, and assessments.
The 501 c 3 tax-exempt social clubs serve the general public and do not offer benefits to specific members or groups, while 501 c 7 social clubs exist to serve their members and constituents.
According to the Internal Revenue Service, charitable contributions to section 501(c)(7) organizations are not tax deductible. However, if they are ordinary and necessary in the taxpayer's business, they can be deductible as business expenses or trade with valid gross receipts. The organization must make certain disclosures and pay a proxy tax related to the due payments.
A 501(c)(7) organization is designed to serve the personal and private interest of its members, focusing on providing social and recreational benefits rather than serving the broader public interest.
A 501(c)(7) organization can generate revenue on gross receipts but must adhere to specific Internal Revenue Service regulations to maintain its tax-exempt status. Organizations like country clubs or social clubs should have primary income through membership dues, fees, and assessments, not private interest or unrelated business income.
These funds should further benefit members through the club's recreational, social, or similar purposes. Social clubs can earn revenue from other sources, but it has restrictions. The Internal Revenue Service allows these organizations to receive up to 35% of their gross receipt from sources aside from nonmember investment income.
Unrelated business income refers to revenue your 501(c)(7) tax exempt organization earns from conducting activities unrelated to its tax-exempt purposes. It is subjected to unrelated business income tax. Some of these unrelated business income activities for social clubs are:
Renting out the club facilities to non-members for events.
Selling timber cut from club land.
Selling food and drinks to non-members.
Accepting advertising in club newsletters or more publications.
Proceeds from the total liquidation of club assets or partial liquidation of club assets.
For the social club's exempt purpose, a 501(c)(7) organization needs to know about investment income and how it relates to personal and private interest of members.
Dividends and interest are subject to Unrelated Business Income Tax (UBIT).
No more than 35% of total social club income can come from nonmember income, and no more than 15% can come from nonmembers' use of the club's facilities.
Social clubs funded by nonmember income need to be aware that no more than 35% of total social club income can come from nonmember income, and no more than 15% can come from nonmembers' use of the club's facilities.
Violations will jeopardize income taxation and status as an exempt organization
To apply for 501(c)(7) tax exemption status in Texas, you’ll need to file your organization’s Articles of Incorporation with the state, apply for an Employer Identification Number (EIN) with the Internal Revenue Service, and submit IRS Form 1024 for tax-exempt recognition. Don’t forget to create bylaws and ensure your purpose aligns with social club guidelines.
Sports fan clubs can qualify as 501(c)(7) organizations as long as they operate primarily for recreational or social purposes and meet the Internal Revenue Service requirements for membership-based social clubs.
To start a 501(c)(7) in Indiana, you must incorporate your club with the Indiana Secretary of State, obtain an EIN from the Internal Revenue Service, and apply for federal tax exemption status using Form 1024. Be sure to check Indiana-specific rules for nonprofits!
Creating a 501(c)(7) involves drafting your club’s mission, filing Articles of Incorporation with your state, applying for an EIN, and submitting IRS Form 1024. You’ll also need bylaws and a clear plan for maintaining your social club’s purpose and membership structure.
No, donations to a 501(c)(7) organization are not deductible from federal income tax because these clubs exist for the benefit of their club members rather than the public at large. For example, if you have donations to support a tennis club, funds paid are not eligible for deductions.
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