Does your Club offer to-go meals or have a wine club?
If so, the IRS may be interested in talking to you.
In an effort to find ways to continue to serve member needs, many Clubs have begun offering take-out meals on both a daily basis and for holidays. In addition, because wine and liquor can be bought at volume discounts, those discounts are often passed on to members though wines club sales.
The IRS calls these types of business activities “non-traditional” for 501(c)(7) tax exempt private clubs. They are considered “non-traditional” because the IRS has said they do not further the tax exempt purpose of the Club. As such, they could potentially jeopardize your Club’s tax exempt status.
There are several areas the IRS has determined to be “non-traditional” business activities that are of concern for private clubs, including:
- Take-out food and beverage.
- Off-site catering
- Wine sales for off-site consumption
- Personal services including barber shops and long-term room rentals.
If the income from these activities exceeds a de minimis amount, that income could jeopardize your Club’s tax exempt status. In fact, the IRS clearly tells its agents “Social clubs may lose their tax exempt status if the nontraditional business activities are not incidental, trivial or nonrecurrent”.
In determining whether a Club’s “nontraditional business activities are not incidental, trivial or nonrecurrent” (or de minimis), there appears to be no formal “safe-harbor” limit a Club can live within before it might have a problem.
IRS rulings have shed some light on what would be considered de minimis income from the areas considered to be non-traditional. In one ruling, a Club was found to have exceeded the de minimis amount when its non-traditional income was greater than 5% of its total income. However, it might well be that Clubs cannot rely on applying the 5% limit to their situations as the agent that wrote that opinion also stated that he was concerned that an amount in excess of $100,000 from non-traditional activities may not be deemed de minimis.
If your Club offers any of the services that might be considered non-traditional, we suggest that you quantify the amount of income from these areas and determine if you could be facing a problem. If so, we urge you to take steps to eliminate the areas that could be problematic.
If you have any questions or need any assistance in this area, please contact Elmer Laydon of our Private Club Services Group.
This article is designed to provide general information in regard to the subject matter. As everyone’s facts and circumstances are different, this article has been prepared with the understanding that neither Laydon and Company, LLC nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, please call Laydon and Company, LLC’s Private Club Services Group to discuss your specific circumstances.