If your club wishes to pursue tax-exempt status we recommend the assistance of an attorney or tax professional. The purpose of this article is to provide some basic information to help your club make a decision on whether or not to start the process.
There are two main tax-exempt designations that flying clubs can pursue:
1. A charitable organization, also known as a 501(c)(3)
2. A social and recreational club, also known as a 501(c)(7)
501(c)(3) Charitable Organizations
A 501(c) (3) is a tax-exempt charitable organization that serves the public interest. The advantages to this type of organization include exemptions from various income and property taxes. Also, the ability to receive tax-deductible donations is a major benefit. This might help a flying club obtain grants, gifts of cash, or tangible items such as an aircraft or hangar.
But there are disadvantages, first in terms of additional paperwork and scrutiny that come from obtaining and maintaining 501(c) (3) status with the IRS. Second, the majority of traditional flying clubs are likely to be uncomfortable with the operational restrictions that accompany charitable status. The IRS wants to see the club maintaining an exclusive focus on activities that benefit society as a whole, and frowns upon any activities that look like the club members are obtaining personal benefits.
For example, a number of flying clubs have a strong emphasis on providing free flight instruction to young people. But to qualify for 501(c) (3) status this would need to be the exclusive focus. It would create problems if the club’s airplanes were also used to provide an affordable flying opportunity for club members.
So, while some flying clubs have successfully received a 501(c) (3) determination from the IRS, it’s quite rare, and tends to be restricted to clubs with a highly specialized mission.
501(c)(7) Social and Recreational Clubs
A much more common structure, adopted by several hundred flying clubs, is 501(c) (7) status, commonly referred to as a social club. The chief benefit here is that the club does not pay federal taxes on its day-to-day activities. This can be of practical assistance to flying clubs in examples such as transfers of equity shares from one member to another, assessments of members, sale of club assets or the final liquidation of the club. However, donations to a 501(c) (7) social club are not deductible as charitable contributions on the members’ individual tax returns.
Generally, social clubs are membership organizations primarily supported by dues, fees, charges or other funds paid by their members. They must be organized for pleasure, recreation, and other nonprofit purposes but unlike other tax-exempt organizations, a 501(c) (7) need not provide a public service or other community benefit. It’s a good fit with the typical flying club. Indeed, IRS guidelines actually cite flying clubs as an example of the kind of organization that fits this designation.
But don’t take it for granted that your application will be approved just because you call yourself a flying club. An important element that must be present is what the IRS describes as “personal contact, commingling and face-to-face fellowship.” The IRS gives an example of a flying club organized solely for the purpose of owning, operating and maintaining several aircraft, used by the club members for affordable flying. However, because there were no social activities in the club, the IRS denied 501 (c)(7) status. So make sure you emphasize how your club creates “personal contact, commingling and face-to-face fellowship” amongst its members.
Finally, be aware that a 501(c) (7) club could lose its tax exempt status if it engages in significant business outside of its exempt purpose or if it receives too much income from non-members. Generally, no more than 35 percent of the club’s revenues can come from non-member sources.
Seek the advice of an attorney or tax professional about the specifics of your organization. If your club decides to pursue tax-exempt status, you will be required to file an application packet to the IRS. If a favorable determination is received you will need to complete annual returns specific to your exemption.