By Kerri Rawcliffe, CPA, Partner, Brooke Rossi, CPA, Director and Amber Stone, CPA, Director
Navigating nonmember revenue can be complex for private clubs, often sparking internal debates about its financial impact and compliance with IRS regulations. While many club managers understand the rules at a high level, the nuances — especially in tracking and reporting — can pose challenges and potential risks. Fortunately, Internal Revenue Service (IRS) Revenue Procedure 71-17 (RP 71-17) provides clear guidelines to help clubs manage nonmember revenue effectively. Below, we break down the key requirements and best practices to ensure compliance.
Scope and Background of Revenue Procedure 71-17
RP 71-17 is applicable for section 501(c)(7) tax-exempt clubs. Section 277 taxable clubs, however, are also responsible for tracking and reporting nonmember revenue. While taxable clubs are not subject to the same limitations as tax-exempt clubs, understanding these rules can help them meet their own compliance requirements.
It also defines nonmember revenue and the related recordkeeping requirements. Accurately calculating this revenue is crucial for two reasons: first, excessive nonmember revenue could jeopardize a club’s tax-exempt status; second, clubs are subject to income tax on net unrelated business income, which includes net nonmember revenue.
Guidelines
RP 71-17 provides two scenarios where income is presumed to be member-related:
- If a group of eight or fewer individuals includes at least one member and payment for use is received directly from the member (or the member’s employer).
PKFOD Observation: This guideline is the basis for the “party of eight or more” forms discussed below.
- If 75% or more of a group of any size using club facilities are members and payment is received directly from one or more of the members (or the members’ employers).
In all other situations, clubs must maintain additional records to substantiate that the income is member-related. Without proper documentation, the income would default to being nonmember-related. Clubs often collect this information using “party of eight or more” forms.
Recordkeeping Requirements
In either of the scenarios above, the club must maintain records to substantiate the situation – for example, number of attendees, their member status and who paid for the usage.
Outside of the two scenarios above, the club must maintain the following for each event or occasion:
- Date of the event
- Total number of attendees
- Number of nonmembers
- Total charges
- Charges attributable to nonmembers
- Charges paid by nonmembers
Additionally, if a member pays all or part of the charges related to nonmembers, the member should sign a statement indicating whether they will be reimbursed by a nonmember and the amount of the reimbursement. If a member’s employer pays the club directly or reimburses the member, the member should document the direct business or social purpose of the member.
“Party of Eight or More” Forms
Any record containing the required information can be used to fulfill the “party of eight or more” requirements. Reviewing the guidelines and thresholds discussed above reinforces the necessity of maintaining these records. Failing to do so may result in revenue being classified as nonmember related during an IRS examination.
PKFOD Observation: There is no official IRS form called “party of eight or more.” Any form that includes the information listed above is acceptable. Sample forms from publications such as the Club Tax Book provide options for clubs to use in satisfying this requirement.
Tips to Ease the Recordkeeping Burden
- Include the form as part of your event contract so that it is signed upfront.
- Conduct periodic reviews of your event listing to ensure forms are completed promptly (to prevent the challenge of locating former or deceased members later on).
- Educate members on the importance of these forms – i.e., how it could be detrimental if the club was to lose their tax-exempt status – to protect the club’s tax-exempt status.
- Distribute recordkeeping responsibilities among employees to alleviate the burden on the controller.
- Customize forms to streamline data collection.
We Can Help
Establishing a seamless process for tracking nonmember revenue can be challenging, especially when handling niche situations. While the guidelines above provide a strong foundation, we are here to offer additional guidance and troubleshooting as needed.
To read the full IRS ruling, click here.
Contact Us
We welcome the opportunity to answer any questions you may have related to this topic or any other accounting, audit, tax or advisory matters for private clubs. Please reach out to your PKF O’Connor Davies client service team or any of the following:
Kerri Rawcliffe, CPA
Partner
krawcliffe@pkfod.com
Brooke Rossi, CPA
Director
brossi@pkfod.com
Amber Stone, CPA
Director
astone@pkfod.com