Private Club Perspectives: Five Practical Tips to Avoid Hidden Tax Compliance Risks

Home » Insights » Private Club Perspectives: Five Practical Tips to Avoid Hidden Tax Compliance Risks

Private club managers and board members spend much of their time discussing how to sustain their clubs: increasing dues, funding capital projects and enhancing the member experience. These are all extremely important areas to ensure a club’s long-term success. Yet one of the greatest risks many clubs face that jeopardize their longevity isn’t a complex transaction. It’s inadequate documentation of transactions that could lead to an overpayment of taxes. 

To comply with Internal Revenue Service (IRS) rules, tax-exempt clubs must separately track member versus non-member income to derive the required Unrelated Business Taxable Income (UBTI) calculation. While the IRS rules have been in place for decades, many clubs continue to track incorrectly, exposing themselves to unnecessary risk of paying unnecessary tax dollars simply by failing to document events properly.

To help your private club avoid this tax risk, we offer five practical tips: 1) Understand the 35%/15% Tests, 2) Validate Business Purpose, 3) Diligently Document, 4) Develop Procedures in Advance and 5) Review Everyday Expenses. Each is explained below:

1. Understand the 35%/15% Tests (and Classify Correctly)

If you are responsible for your club finances, you’re familiar with section 501(c)(7) of the Internal Revenue Code (IRC) that requires exempt clubs to limit non-member income. Since 1976, the IRS has generally looked to the 35%/15% tests when evaluating whether a club continues to qualify for tax-exempt status:

• 35% Total Limit from Outside Revenue: Maximum 35% of gross receipts can be derived from non-member activities.
  • Includes investment income (interest, dividends) and outside fees.
    
    
• 15% Public Facility Limit: Maximum 15% of gross receipts can be derived from public use of facilities/services.
  • This includes non-member weddings, golf outings, or public restaurant sales.
  • This percentage is nested inside the overall 35% allowance.

Income from non-member activities, more broadly called unrelated activities, can become a significant issue if it is not properly identified and tracked by your club.

UBTI is calculated as gross income from unrelated activities, less allowable deductions, excluding exempt-function income. Correct classification of revenue is therefore critical.

2. Validate Business Purpose: It’s Not Always About Who Attends or Pays

One of the most common misconceptions is that the person paying the bill determines whether income is member or non-member income. In reality, the facts and circumstances matter. Consider these examples:

• Member Wedding: One of your members hosts and pays for their child’s wedding reception.
• Because the event directly benefits the member’s immediate family, the revenue is generally considered member income.
• Non-Member Payment: The groom’s parents reimburse the member for a rehearsal dinner or pay the club directly.
• Although your member may have made the reservation, the economic benefit is for non-members, making the revenue non-member income.

Similarly, when corporations pay club invoices, your club should evaluate why the company is paying and whether your sponsoring member’s role within the organization demonstrates a legitimate business purpose.

3. Your Best Defense: Diligently Document

From an IRS perspective, documentation is often just as important as the tax conclusion itself. Under IRC Section 501(c)(7), Revenue Procedure 71-17 lists the specific documentation required. Forms commonly referred to as Party of More than 8 or 71-17 forms have been developed by club industry experts to help gather and document the necessary information.

Producing a well-maintained file demonstrates that your club has established procedures for determining whether an event generates member or non-member income. In an IRS audit, a “thick file” containing supporting documentation is much more reliable and credible than verbal explanations given years after the event occurred. Consider the below best practices for your club’s documentation:

• Follow the +8 Protocol: Require a 71-17 form for every function involving more than eight guests.
  
  
• 71-17 Forms When Members are Absent: For events with eight or fewer guests, the member should be present.
• If the member is not in attendance, the 71-17 form should still be completed.
• Complete the 71-17 Anyway: Whenever possible, ask the sponsoring member to complete the 71-17 form — even if the club believes the event clearly qualifies as non-member income.
• This best practice consistently strengthens compliance and awareness amongst the staff and members.

NOTE: If your member sponsors an event, the member (not the non-member guest) should sign the 71-17 form. Only when there is no sponsoring member should a non-member complete the documentation.

4. Develop Advance Procedures (Before Every Event)

The strongest compliance programs build documentation into the event-planning process rather than chasing paperwork afterward. Your club should consider incorporating these practices:

• 71-17 Default: Include the 71-17 form as part of every event agreement.
  
  
• Train Staff: Train catering, accounting, membership and event staff on why the form matters.
  
  
• Educate Members: Provide educational materials explaining the purpose of the form to members.
  
  
• Four-Year Doc Retain Practice: Retain documentation for at least three years, although maintaining records for four years provides additional protection.
  
  
• Paper or E-File Both Work: Maintain records electronically or on paper. Both are acceptable.
  
  
• Collect Forms in Advance: Emailing forms is perfectly acceptable, though collecting them before the event is preferable to requesting signatures afterward.

5. Review Everyday Transactions (They Matter Too)

Compliance extends beyond catered events. Consider these everyday transactions, as example:

• Legacy Status: A member’s spouse and dependents are generally treated as members.
  
  
• +75% Member Attendance: Club-sponsored events where attendance is overwhelmingly comprised of members (such as a breakfast with Santa attended primarily by member families) may not require additional documentation as long as more than 75% of the attendees are members.
  
  
• Member vs. Non-Member Retail Purchases: Retail operations, such as golf shops, should have procedures that distinguish purchases made by members from those made by non-members, including separate payment classifications when appropriate.

The Bottom Line

Tax compliance for your private club isn’t simply about understanding the rules — it’s about creating consistent processes that demonstrate your club’s compliance. Clubs that fare best during IRS examinations aren’t necessarily those with the fewest non-member events; they’re the ones that can clearly document how every event was evaluated and classified.

Ensure your club focuses on being proactive with its documentation rather than scrambling shortly before an IRS examination. By embedding sound procedures into its daily operations, your club can protect its tax-exempt status and give leadership confidence that it’s prepared for whatever questions may arise during an IRS examination.

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 and taxable clubs. Please reach out to your PKF O’Connor Davies client service team or email any of the private club services team members below:

Steve Noyes, CPA
Partner
snoyes@pkfod.com

Kerri Rawcliffe, CPA
Partner
krawcliffe@pkfod.com

Brooke Rossi, CPA
Partner
brossi@pkfod.com

Amber Stone, CPA
Director
astone@pkfod.com