Is curbside pickup jeopardizing your tax-exempt status?

Risks to not-for-profit social clubs

Now more than ever, it is critical for not-for-profit social clubs to continually evaluate developing guidance in order to retain their tax-exempt status. Social clubs are exempt from federal income tax under Internal Revenue Code (IRC) 501(a) as organizations described in IRC 501(c)(7), if they are "organized for pleasure, recreation, and other non-profitable purposes for their members." Historically, the Internal Revenue Service (IRS) indicated that gross revenue for off-premise consumption of items (such as food, cases of wine, beverages and catering) fall into the category of nontraditional business or activities that do not further the purpose of the club. Most recently, in light of the changing business models created by COVID-19, the IRS and Congress have taken the position that clubs should not receive more than a de minimis amount of gross revenue from this category. As clubs move toward more food- and beverage-related curbside pickup for off-premise consumption, clubs may risk their tax-exempt status in multiple ways, including:

• The IRS has used a 5% threshold for gross receipts from nontraditional revenue from members. This is a low threshold and may easily be surpassed as clubs also experience a decline in gross revenue.
• Further increasing the risk to the club, the nontraditional income amounts must also be included in the nonmember threshold test commonly known as the 35/15 percent test.

Steps to take now:

In the midst of a pandemic, and with many states overseeing “shelter in place” orders, there may be a position for club facilities’ curbside food and beverage pick-up to be considered member-related revenue. To reduce risk, clubs should:

1. Limit nontraditional sales-to-go activities
2. Closely track their sales during this time in order to produce documentation/records upon request from regulators
3. Discontinue curbside pickup activities once club facilities re-open

For more information on this topic or to learn how Baker Tilly specialists can help, contact our team.