What Are the Benefits of a 501(c)(7) Tax-Exempt Club?

By Christine Funk, J.D.

What Are the Benefits of a 501(c)(7) Tax-Exempt Club?

By Christine Funk, J.D.

Under the federal tax code, certain social clubs are tax-exempt. Many consider having a tax-exempt club beneficial enough to make tax-exempt status worth pursuing. Other benefits of a 501(c)(7) club include the fact that like-minded people can pool their resources to pursue a particular goal or passion without having the burden of additional tax consequences. However, to attain tax-exempt status, your club must meet certain conditions.

Group of people sitting around a table drinking beverages and smiling

Guidelines for Social Clubs with Exempt Status

Section 501(c)(7) of the Internal Revenue Code (IRC) describes the conditions of social clubs that are exempt from federal taxes. These conditions include:

  • The club must be designed to serve a purpose exempt under the code (see the next section).
  • Substantially all of the activities of the club must be in pursuit of the exempt purposes of the club.
  • The club must offer opportunities for personal contact among members.
  • Membership must be limited.
  • The club must be supported by the fees, dues, and assessments paid for by the members.
  • The net earnings of the club cannot inure to the benefit of anyone who has a private or personal interest in its activities.
  • The club may not have provisions that allow for discrimination based on a person's race, color, or religion.
  • The club may not represent itself as a club providing goods or services to the public at large.

When a club meets these guidelines, they are not required to pay federal taxes, but state taxes may be different.

Purpose of an Exempt Social Club

For a social club to attain tax-exempt status, in addition to meeting the guidelines established above, the club must have an express purpose that meets IRC requirements. According to IRC Section 501(c)(7), the club must be organized for recreation, pleasure, or another similar purpose.

As mentioned, clubs are prohibited from maintaining policies, bylaws, governing instruments, or charters that provide for the discrimination of people based on race, religion, or color in order to maintain their tax-exempt status. However, there is a "good faith exception" to allow for the limitation of membership to the members of a particular religion if the purpose of the club is in furtherance of the principles or teachings of a given religion.

Benefits of an Exempt Social Club

One major benefit of this type of social club is that it allows the members to pool their resources and benefit from these larger, pooled resources. Members may develop a members-only clubhouse, pool, or golf course. People can create social clubs to support the alumni of a certain school, pursue a sport, or learn a hobby. It has been said that there are no doubt more types of clubs than there are clubs in a deck of cards. In each instance, the members benefit from the larger resources a group can offer.

Of course, the ability to avoid taxes is in and of itself a benefit. Further, the purpose of the club must remain the pursuit of pleasure, recreation, or another nonprofit purpose. Studies have shown that the pursuit of pleasure reduces stress, which may extend lifespan. Finally, by pooling resources, club members may be able to obtain a level of pleasure pursuits that, individually, members could not attain.

If you are considering starting a tax-exempt social club, it is a good idea to consult with a tax professional or an online service provider for assistance.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.

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