501(c)(7) Nonmember Income Limits: What Every Club Must Track

Most member-owned country, golf, yacht and city clubs are tax-exempt social clubs under Section 501(c)(7) of the Internal Revenue Code. That status depends on the club being supported mainly by its members. The IRS measures this with gross receipts limits on nonmember and investment income, and clubs that exceed them year after year risk losing their exemption.

This guide explains the limits, what counts toward them, how nonmember income is taxed, and how to track it monthly. It is general information; your tax advisor should confirm your club's position.

Key takeaways

• Up to 35% of gross receipts may come from outside the membership, including investment income.
• Within that, no more than 15% may come from nonmember use of facilities.
• Net nonmember and investment income is taxable on Form 990-T.
• Track both percentages monthly in the finance committee package.

The 35 percent and 15 percent limits

Under guidance that followed the 1976 amendment to Section 501(c)(7), a social club may receive up to 35 percent of its gross receipts, including investment income, from sources outside its membership. Within that 35 percent, no more than 15 percent of gross receipts may come from nonmember use of club facilities and services.

A club with no nonmember facility income could therefore receive up to 35 percent of gross receipts from investment income. A club with 15 percent from nonmember use could receive up to 20 percent from investments.

If a club exceeds the limits, the IRS looks at all the facts and circumstances, including how far over the limits the club was, how often, and whether the excess came from an unusual event. IRS determination letters show clubs losing exemption after exceeding the limits for several consecutive years, often combined with poor records.

What counts as nonmember income

• Outside banquets, weddings and events not sponsored by a member.
• Green fees, cart fees and court fees paid by the general public.
• Outside tournaments and charity outings without qualifying member sponsorship.
• Rental of club facilities to outside groups.
• Guest fees where the guest pays the club directly, depending on the facts.
• Investment income such as interest and dividends, which counts toward the 35 percent limit but not the 15 percent limit.

Whether a function counts as member or nonmember use depends heavily on records. Revenue Procedure 71-17 sets presumptions for small groups and member-majority groups and the documentation required for everything else.

How nonmember income is taxed

Staying within the limits protects exemption. It doesn't make nonmember income tax-free. Under Section 512(a)(3), a social club's unrelated business taxable income includes net income from nonmember sources and investment income. The club reports it on Form 990-T.

Two points cause trouble. First, expenses must be allocated reasonably between member and nonmember activity, and the method should be documented. Second, the Supreme Court held in Portland Golf Club v. Commissioner (1990) that a club can offset nonmember losses against investment income only if the nonmember activity is carried on with an intent to profit. Since 2018, the separate-activity rules of Section 512(a)(6) also limit netting losses from one unrelated activity against income from another. Your tax preparer should review the allocation method each year.

How to monitor the limits monthly

Don't wait for the tax return. Add a nonmember income schedule to the monthly finance committee package:

• Code every event and nonmember charge in the POS and event system as member, member-sponsored or nonmember.
• Track nonmember facility receipts and investment income as percentages of year-to-date gross receipts.
• Project the full year, including booked events.
• Flag when nonmember use approaches 12 percent or total outside income approaches 30 percent, so management can adjust bookings.
• Reconcile event records and Rev. Proc. 71-17 forms monthly.

See club finance committee charter for where this fits in the monthly review.

Planning around large one-time items

Large one-time receipts, such as sale of land, a cell tower lease or a big investment gain, can push a club over the 35 percent limit in a single year. The facts and circumstances test considers whether the item is unusual and whether the club is otherwise operated for members, but planning ahead is safer. Talk to your tax advisor before signing a large nonmember contract, and consider timing and structure.

Clubs that operate a separate taxable subsidiary for public-facing activity should make sure transactions between the entities are documented at arm's length. An experienced club CFO can set up the tracking and work with the club's tax advisor.

Common questions

What are the 501(c)(7) nonmember income limits?

A tax-exempt social club may receive up to 35 percent of gross receipts from outside its membership, including investment income, and within that no more than 15 percent from nonmember use of club facilities and services.

Does investment income count toward the 15 percent limit?

No. Investment income counts toward the 35 percent limit only. The 15 percent limit applies to nonmember use of facilities and services.

What happens if a club exceeds the 35/15 limits?

The IRS applies a facts and circumstances test. Exceeding the limits for several years, especially without proper records, has led to revocation of exemption in published IRS determinations.

Is nonmember income taxable for a 501(c)(7) club?

Yes. Net nonmember income and investment income are unrelated business taxable income under Section 512(a)(3) and are reported on Form 990-T.