Social Club Rules according to the IRS
The Club -- which is a 501 c 7 Social Club according to the IRS -- is limited to earning 35% of gross receipts from sources outside the membership. This includes non-member (e.g., guest) receipts as well as advertising in Club newsletters or other publications ( e.g., yearbook) and investment income. If the Club receives too much unrelated business income, it may lose its tax exempt status.
If the Club earns $1000 or more gross income from an unrelated business it must file Form 990-T. This is an extra form not normally required. This form requires that a tax be paid on the income from nonmembers, from the advertising, as well as from investment income.
Selling liquor to members for off site consumption is a nontraditional business activity for a club and should be avoided. If such nontraditional business activities exceed 5% of gross receipts, then the social club may lose its exempt status. These activities are therefore to be held to a minimum. 5% is not a reliable limit; it may be less.
In general a social club should be supported solely by membership fees, dues, and assessments. Benefits (social and recreational) to members are funded by members.
Conducting more than an insubstantial amount of nontraditional business activities will jeopardize a social club's exempt status. A club must not engage in nonmember activities for the purpose of deriving a profit.
A social club may not solicit public patronage through advertisements. This would indicate that the Club is engaged in a business and not operated for social purposes.
Proceeds derived from the general public are not derived from members and are therefore not derived from exempt activities.
Cash prizes awarded to winners are okay as long as they come from member entry and dues. A Social Club may not discriminate for membership (have restrictions) based on race, color, sexual orientation or religion.
The Club must be composed of individuals (not corporations) and organized for pleasure or recreation. The membership must be limited and consistent with the character of the Club.
Activities and facilities should not be open to the general public. Guests of the members are allowed.
Donations to social clubs are not deductible as charitable contributions on the donor's federal income tax return.
The organization's net earnings may not inure to the benefit of any person having a personal and private interest in its activities.
A social club that engages in recurring, nonincidental, profit-driven activities that result in the inurement of a private benefit to its members is engaged in nonexempt activities. This includes compensation to a member or members and income from nonmember sources used to benefit members. Income-producing activities that are other than incidental, trivial, or nonrecurring will defeat exemption. However, a member may be paid for administrative duties if the pay is reasonable.