The 501 S(c)ene

The latest view on not-for-profit accounting issues

Is Your Club or Association a Tax Exempt Entity? Part II

In my last blog post, I talked about a threshold level for the requirement to file Form 1023, (Application for Recognition of Exemption under Section 501(c)(3)).  Here is some additional information about small social clubs and filing requirements.

As you may recall from some of our previous blogs, the Form 990-N became a filing requirement for smaller organizations several years ago.  Prior to that requirement, any nonprofit organization with less than $25,000 in annual gross receipts did not have an annual filing requirement.  That rule changed with the 990-N which requires that even these small organizations must file (note that there are exceptions for certain organizations such as churches).

Small social club organizations (for example, a softball league) fall under Section 501(c)(7) of the Internal Revenue Code.  501(c)(7) organizations include social and recreation clubs, organized for pleasure, recreation, and other similar nonprofitable purposes.  If a social clubs chooses to be recognized officially as a tax exempt entity, they must file Form 1024 (Application for Recognition of Exemption Under Section 501(a)).  However, filing this 1024 application is not required- it is optional.

The important point here is that whether or not a small organization, such as a social club, chooses to file Form 1024, the organization is still REQUIRED to file the Form 990-N at a minimum (unless it meets one of the exceptions, such as being a church).  This is also true for a small 501(c)(3) organization that has less than $5,000 in gross receipts.   As pointed out in my last blog on this issue, that small 501(c)(3) is not required to file a Form 1023 for application of tax exempt status.  But as I’m pointing out in this blog post, that small 501(c)(3) organization is still required to file the Form 990-N at a minimum.  When I say “at a minimum”, this means that if you have less than $50,000 in gross income in 2010, you file a Form 990-N.  If you have more than $50,000 in gross income in 2010, you are required to file either the Form 990-EZ or the Form 990.

What if your social club does not file a 990-N?  If you go three years without filing, the IRS will treat your organization as a taxable entity.

To file a 990-N, go to: http://www.irs.gov/app/scripts/exit.jsp?dest=http%3A%2F%2Fepostcard.form990.org%2F

By Colette Kamps, CPA

Comments

  1. Hurley Richardson says:

    I am a member of a riding club and we need a TIN to open a banking account. We take dues from members to pay for land leases and club house rent. Our annual dues and fund raisers do not exceed 25k. What would we need to do to satisfy the IRS requirements?

    • admin says:

      Hurley –

      Thank you for your interest in our blog.

      It sounds like your organization would fit the category of recreational association. If you decide to apply for tax exempt status with the IRS, you would need to complete Form 1024 (application for tax exempt status). This form can be found on the IRS website.

      Colette Kamps, CPA

    • Judy says:

      Also a member of a riding club, but our club is sponsored by a for profit motorcycle store. Information received indicates that with our sponsor being for profit that we cannot be non-profit. If we have minimal income do we have to file annual returns? And if so what form should we use?
      Thanks for this blog!

    • admin says:

      Hello Judy –

      Thank you for your interest in our blog!

      If your association is supported through contributions by a for-profit entity, that does not necessarily mean that your association can’t be a non-profit entity or a tax exempt entity.

      If your association’s gross income is less than $5,000, you generally do not need to apply for tax exempt status. However an annual tax filing is required. With income less than $50,000, you can “file” a very simple online form called the Form 990-N, which only asks 8 simple questions.

      Colette Kamps, CPA

    • Jo B. says:

      I have recently been elected treasurer of an AKC recognized dog club (single breed). We have bylaws and a state ID tax number. We collect dues and host specialty shows twice a year. The costs of the specialty shows exceed membership income, so rally and obedience trials are held in conjunction with the specialty shows to defray costs. The club has a bank balance of $8k and has had a positive balance over $5k for several years. I have pushed for the club to register as a 501c7, but some members are resistant. Are we under obligation to file a tax return whether we are recognized as a nonprofit or not? If we do not file a tax return, what are potential implications for the club or for the treasurer?

    • admin says:

      Jo –

      Thank you for your interest in our blog! From the information you have provided, it sounds to me as if you are operating as a nonprofit organization. If you have not applied for tax exempt status as a 501c7, then you are effectively “self declaring” that status (it is considered “self declaring” because you are not technically required to file for exemption, although organizations do so in order to make it official with the IRS). Not filing for exemption has nothing to do with the requirement for filing an annual tax return. Generally, all exempt organizations are required to file annually. If the organization has gross revenues of $50,000 or less, you can do the very simple online form, called the Form 990-N or “e-postcard”.

      Colette Kamps, CPA

  2. Sandra says:

    Thanks for your very helpful information!

    In January of last year, our meditation group decided to open a bank account. We collect member donations to help pay for our meeting place and run one meditation retreat per year. I ended up getting a DBA, which the bank told us we needed, in order to open the account.

    We want to be sure we’re doing things legally, so it seems that we should get an EIN and file a 990-N (we collect over $5k per year).

    But the SS-4 application asks what type of entity we are. I can’t figure out whether to use “Sole Proprietor,” which is on my DBA, or “Social and Recreational Club,” which is really what we are. I’m also unclear on whether I need to drop the DBA since the EIN should satisfy the bank’s requirement.

    I wish I’d known about the SS-4 earlier…. Many thanks for your help!

    • admin says:

      Hi Sandra,

      It sounds like your meditation group would be a social/recreational organization. If you were going to file an application for tax exempt status, you would file the Form 1024 and ask for tax exempt status under 501(c)(7). There is a specific IRS rule that if you are a 501(c)(3) organization (which is a public charity, the most common type of tax exempt entity), and you have less than $5,000 in annual gross revenue, you are statutorily exempt from the requirement of filing a Form 1023 tax exempt application. There isn’t a similar specific exemption like this for those who would be required to file a Form 1024 (which is your situation), but there is a general rule of thumb that the IRS does not expect most very small tax exempt organizations to file a Form 1024 to get the official recognition of tax exemption.

      Although you may not be required to file the Form 1024 (as there is no specific due date), you are still required to file the annual tax return. As you noted, if you have less than $50K in gross revenue, you can file the 990-N, which is a very simple 8 question “form” that is only done online. Once you obtain an EIN for banking purpose (which is what you can check off on Form SS-4), you should be able to begin “filing” that form online on an annual basis. When you are ready to do that, if you find that you are not recognized for some reason in the IRS database, you will need to call the IRS (1-877-829-5500) to inform them that you should be shown as a tax exempt organization in their database.

      Thank you for your interest in our blog!

      Colette Kamps, CPA

  3. Sharlene Hudson says:

    Our golf league has been very loosely organized over the past few years. We are now to the point that I feel we need a EIN for banking purposes. Do we need to file for non-profit status. We hold 1 tournament per year and donate the proceeds to charity. Otherwise it is small member-only activities.

    • admin says:

      Hi Sharlene-

      A golf league would be a social/recreational organization. If you were going to file an application for tax exempt status, you would file the Form 1024 and ask for tax exempt status under 501(c)(7). There is a specific IRS rule that if you are a 501(c)(3) organization (which is a public charity, the most common type of tax exempt entity), and you have less than $5,000 in annual gross revenue, you are statutorily exempt from the requirement of filing a Form 1023 tax exempt application. There isn’t a similar specific exemption like this for those who would be required to file a Form 1024 (which is your situation), but there is a general rule of thumb that the IRS does not expect most very small tax exempt organizations to file a Form 1024 to get the official recognition of tax exemption.

      Although you may not be required to file the Form 1024, you are still required to file the annual tax return. If you have less than $50K in gross revenue, you can file the 990-N, which is a very simple 8 question “form” that is only done online. Once you obtain an EIN for banking purpose, you should be able to begin “filing” that form online on an annual basis. When you are ready to do that, if you find that you are not recognized for some reason in the IRS database, you will need to call the IRS (1-877-829-5500) to inform them that you should be shown as a tax exempt organization in their database.

      Thank you for your interest in our blog!

      Colette Kamps, CPA

  4. Deborah says:

    A friend who is a member of a women’s group I belong to just passed away. She started an artists collaborative within the group. I have created a memorial booklet and would like the funds to be availabe to support this group in growing in venues and opportunities (ie paying for entrance or tables in local craft fairs or events) or sponsoring another artist to be in the collaborative ( that costs $99 per year)
    This will be a small fund with several hundred dollars per year max. Is there another way to set this up and run it without adding the income to my personal income or having to file an (expensive) 1024? Do I just maintain a personal account and delare the income and deduct it all as a charitable expense?? If this grew into something bigger I would consider filing all the paperwork, but this is nebulous and small. My bank is telling me it needs a 1024. Thanks

    • admin says:

      Hi Deborah-

      Banks generally require that an organization have a tax ID# in order to set up a bank account. You can file a very simple Form SS-4 (available at irs.gov) to request that the IRS issue your organization a tax ID #. There is a spot on that form where you can check off that this is ONLY for banking purposes. That is probably the route to go with your bank.
      According to the instructions to the Form 1023 (Application for Recognition of Exemption under Section 501(c)(3)), any organization that has annual gross receipts of normally not more than $5,000 is considered tax exempt under section 501(c)(3) even if they do not file Form 1023.
      There is not a rule one way or the other when it is for the Form 1024 (which would be for any other type of tax exempt entity other than a public charity, such as a social club), but if you have annual revenues under $5,000 per year, you probably don’t need to worry about filing the 1024.

      Unfortunately, I am not able to provide you with any advice on your personal tax situation (as far as your question on whether or not to include the income on your tax return), but I can tell you that you are not allowed to take deductions for donations made to an organization that has not obtained public charity status (which is done by filing the Form 1023).

      Thanks for your interest in our blog!

      Colette Kamps, CPA

  5. admin says:

    It sounds like this is a situation where you have a group of people who are just sharing some costs and are all chipping in to cover the cost. If this is the only transaction you have, then you probably are not really an “organization”. However, if you are an organization, where you have a mission, regular income and regular expenses, you are technically required to file the 990-N on an annual basis.

    Colette Kamps, CPA

  6. Texmom says:

    What if your group is not trying to claim tax exempt status? If a group takes donations or dues (NOT tax exempt ones) like everyone chipping in to cover costs like renting a meeting room, etc., do they have to file anything at all? We have an art league that collects dues to cover their meeting place, but they have never filed any kind of taxes or asked for nonprofit/tax exempt status. Are they in violation of anything?

  7. admin says:

    The IRS may not know that the organization exists, especially if the organization never filed the Form 1024 for tax exempt status upon formation. And how would the IRS collect the tax? Unless the organization is involved in activities that produce unrelated taxable income, typically there would not be any tax due, since this type of organization usually operates as a tax exempt entity.

    I agree that the IRS may not track these tiny organizations down, but there is a requirement that they file the 990-N.

    There is no ruling that says that a c7 would be taxed for failing to file a 990-N. No tax would be involved if the organization is operating as a tax exempt entity. There is a requirement that the 990-N be filed and if it is not, the organization could lose its tax exempt status. This is the requirement, but I understand your point about how these organizations may still continue to operate, especially since the IRS may not know they exist. My blog post was simply to point out what the requirements actually are. Thank you very much for your interest.

    Colette Kamps, CPA

  8. Colette,
    You stated “If you go three years without filing, the IRS will treat your organization as a taxable entity.”

    But how will the IRS even know this organization exists if they did not file the 990N? And how would the IRS collect the tax?

    Thousands of small c7s exist, and many (most?) will not be filing the 990N. Surely the IRS cannot track down all these tiny organizations and collect tax.

    I gather that the IRS can request these groups file a 990N, but anticipate that a lot of them will not. I know the IRS does not impose a late fee for delinquent 990Ns.

    Can you point me to the IRS Pub or ruling that states that a c7 would be taxed for failing to file a 990N?

    I appreciate it!