In the first post in this series, we explored why a pickleball club was denied 501(c)(3) status, and how 501(c)(7) is often a better fit for clubs organized around social and recreational activities. As we explained, 501(c)(7) social clubs are designed to serve the mutual interests of their members, not the general public. But qualifying for 501(c)(7) exemption is just the beginning, clubs must also carefully navigate IRS limits on how they generate income, particularly when it comes to revenue from nonmembers.

In this post, we’ll dig into the IRS rules on membership income and how they affect eligibility for 501(c)(7) status. We’ll explain the 35% and 15% income thresholds, what counts as nonmember income, and how things like event tickets or facility rentals can impact your tax-exempt status.

When a nonprofit organization seeks tax-exempt status, understanding the differences between various IRS classifications is essential. This is especially true for clubs and associations focused on recreational or social activities. Take, for example, a pickleball club that recently stepped into the kitchen and was served a denial when it applied for 501(c)(3) status. While the club's mission to provide recreational and social spaces for pickleball enthusiasts might sound ace, it didn’t meet the criteria for 501(c)(3). Instead, it seems more appropriately classified as a 501(c)(7) social club. Let’s rally around the reasons why that is, and what it means for organizations in a similar position.